Warren Buffett: 12 Mistakes Every Investor Makes
In the world of investing, learning from the mistakes of others
is often the fastest path to success.
According to legendary investor Warren Buffett,
almost every investor falls prey to a specific set of errors.
Here are 12 of the biggest investing mistakes you need to avoid.
1. Timing the Market
Focusing too much on what the general stock market
is doing is a massive mistake.
Predicting market movements is alluring
because macroeconomic factors like interest rates, inflation,
and global events affect all stocks.
We want to buy the dips and sell the highs,
but correctly guessing the market’s direction is nearly impossible.
Buffett advises focusing only on what is both important
and knowable: identifying superior companies at fair prices.
Trust that over time, betting on the best businesses
will yield the best results.
2. Getting Attached to Your Purchasing Price
Many investors tie their emotions and future decisions
to the price they paid for a stock.
A stock does not care about your purchasing price.
Stocks have no empathy and treat an investor who lost
38% exactly the same as one who gained 133%.
The only thing that matters for today’s decision to hold
or sell is how the company is likely to perform in the future.
You should always view your investments with a blank slate.
3. Aggressive Growth Projections
Many companies with high valuations defend their share prices
by forecasting astonishing growth.
Expecting a company to maintain a 15% annual growth rate
for a long period is a common mistake.
Buffett loves growing companies,
but growth at any price is a trap.
If you purchase a stock at 20 times earnings, you need massive,
sustained growth to get a good return.
Statistically, very few companies actually manage
to achieve this over a decade.
4. Using a Lot of Leverage
Using borrowed money to invest is the financial equivalent
of playing Russian roulette.
The danger of leverage is that even if your prediction is right,
a temporary market fluctuation can force you out of your position.
If you borrow cash on margin and the stock moves against you,
your broker will issue a margin call.
If you cannot meet it, you are forced to sell at a loss,
permanently eliminating your chance to profit
when the stock eventually recovers.
5. Missing the Forest for the Trees
Buffett can often evaluate a business deal in 15 minutes
because he focuses purely on three main things:
- The future economics of the business and industry
- The quality of the management
- The price Getting caught up in the minute details—a questionable patent or a single labor contract—can cause you to lose sight of the bigger picture.
6. Jumping Over 7-Foot Bars
In many areas of life, you are rewarded for doing the difficult things.
In investing, this is not true.
Doing complicated mathematical acrobatics
or trying to solve incredibly complex business problems
is often disastrous.
Finding a simple, easy-to-understand company
with favorable prospects, honest management,
and a fair price is a much more reliable way
to achieve exceptional results.
You do not get extra points for difficulty.
7. Shrinking Your Universe of Opportunities
It is a mistake to artificially narrow your investment options
to a single industry, sector, or niche.
Opportunities do not stay in one place,
and they often pop up where the general public assumes
they cannot be.
Maintain an open mind and a broad universe of possibilities.
There is a vast difference between staying within your circle
of competence and being small-minded.
8. Staying Active All the Time
Investing is a rare endeavor where inaction is often heavily rewarded.
The investor who constantly buys
and sells is likely to make many mistakes.
Opportunities to buy great businesses at excellent prices
do not present themselves every day.
Buffett compares investing to baseball with no called strikes;
you do not have to swing at every pitch.
You must be patient and wait for the perfect opportunity.
9. Diversifying Too Much
For an investor who knows what they are doing,
over-diversification can be a terrible mistake.
If you can identify six wonderful businesses,
that is all the diversification you need.
Adding a seventh, less-convincing idea will only dilute the returns
of your best picks.
If you are not willing to read up on
and analyze individual businesses,
you should simply diversify completely by buying an index fund.
10. Confirmation Bias
The human brain is wired to interpret all new information in
a way that confirms prior beliefs.
As an investor, this is incredibly costly.
To counter confirmation bias, you must intentionally seek
out dissenting opinions and potential pitfalls.
Use strategies like a “darling-killing funnel,”
where you start with 20 companies
and force yourself to eliminate them down to 10.
Always look for reasons
why an investment might fail before making it.
11. Following the Herd
In most aspects of life, it pays to follow the crowd.
In investing, what is clear to the broad consensus
is almost always wrong.
Humans tend to get fearful en masse and greedy en masse.
The most dangerous time for an investor is when their friends
are getting rich easily on a popular trend.
Following the herd into overvalued,
popular stocks is a fast track to losing money.
12. Omissions
While all the previous mistakes involve taking the wrong action,
Buffett considers his biggest mistakes to be mistakes
of omission—failing to act when he should have.
When an opportunity is well within your circle of competence,
the math makes sense, and the price is right,
doing nothing is a monumental error.
You don’t just nibble at a great opportunity;
you take a full bite.
