Warren Buffett on investment mistakes | Smart Change: Personal Finances

Warren Buffett on investment mistakes |  Smart Change: Personal Finances

(Catherine Broc)

You can find plenty of information online to avoid investment mistakes. What you’ll find less of is real talk about the inevitability of investment mishaps.

If you are buying financial assets, you will be wrong here and there. You could choose the wrong stock or the wrong fund. You might invest too much. You might get too excited about equities and forget to balance your risk with fixed income securities.

You can learn how to work around some of these errors, but not all of them. To back up this claim, I will seek the help of a famous investor warren buffet, also known as the Oracle of Omaha. In his 2021 letter to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders, Buffett said, “I make a lot of mistakes.”

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Buffett’s admission came as he outlined the range of performance trends among Berkshire Hathaway assets. Some of the businesses in the conglomerate are doing very well, some are performing acceptably, and some are “marginal”.

Image source: Getty Images.

If Buffett does investment mistakes, then all investors are. We cannot avoid them. What we can do is manage the impact of these mistakes, financially and emotionally. Here are four strategies that will help you.

1. Diversify asset classes

Investments are grouped into asset classes, or categories that have similar behaviors and risk/reward characteristics. Stocks are an asset class. Bonds, cash and real estate are also asset classes.

Stocks are high growth potential but also high volatility. Bonds provide stable income but do not appreciate like stocks.

When you hold stocks and bonds together, you have elements of growth and stability. To some extent, you can tailor the behavior of your portfolio by holding more or less of each asset class. If growth is more important to you, you own a high percentage of stocks. If you prefer lower growth in favor of stability, you hold more bonds.

Diversification in real estate, cryptocurrencyand other alternative assets can provide growth less dependent on market cycles.

2. Diversify within asset classes

To diversify within an asset class, you hold several stocks, several bonds or several cryptocurrencies, for example.

For stocks, the rule of thumb is to own 20-25 different companies, spread across several economic sectors such as technology, utilities or finance. You can achieve this by selecting stocks or by investing in one or more diversified funds.

3. Commit to investing for the long term

Diversification minimizes the effects of choosing the wrong security. Likewise, committing to a long-term investing habit protects you from another common investor mistake: mistiming the market.

Have a long-term direction is advantageous because the stock market is more predictable over longer periods of time. Stocks can be volatile from year to year, but they generally tend to rise over 10 years or more. In 20 years, the US stock market has always had a bullish trend.

In other words, the easiest path to making money as an investor is to choose quality companies and stay invested in them for decades. After 10 years or more, any untimely purchases will often be moot. After 20 years, you are much more likely to have unrealized gains in your portfolio than unrealized losses.

4. Let it go

If you make a mistake in timing or stock picking, find a way not to get it wrong. Do not count points and do not try to recover losses quickly. You can debrief on what happened to identify lessons or process improvements that can help you. Beyond that, simmering a mistake is not productive.

make money another day

Buffet and others famous investors make mistakes, and you will too. Anticipate slippages by diversifying and staying focused on long-term results. And, when you run into a problem, take the hit and move on. There will be more money to be won another day.

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Catherine Broc has no position in the stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.