We look at seven common mistakes that investors make, according to Warren Buffett
27-Dec-2022 •Mithilesh Bhaumik
Warren Buffett's legendary exploits in the markets are enough to garner him the status of the greatest investor of our time. But the man's candour and willingness to share his investing wisdom are also second to none.
Over the years, through many letters, seminars, and annual shareholder meetings, the chairperson of Berkshire Hathaway has guided millions in their investing journey.
So for this story, we scoured through years of Buffett wisdom and picked the seven common investing sins he has warned investors about.
Timing the market
According to Buffett, spending more time worrying about how the market will fare rather than focusing on the fundamentals of individual businesses is one of the most common mistakes investors make.
No algorithm or planning in the world could have predicted the impact of the pandemic or the rising interest rates that the Russia-Ukraine conflict has induced. Thus, timing the market is near impossible.
Hence, Buffett asks investors to focus more on the important and knowable, such as the fundamentals of a business, how it has fared in the past, and if it can survive future headwinds.
Trading too often
You may believe that if you trade more often, you are sharpening your investing skills. However, that is rarely the case.
Buffett says that if you purchase stocks too often, you are more prone to burnout and mistakes. Investing is not for the impatient. Your prowess as an investor is tied to your ability to identify good investment opportunities rather than how much trading you can fit into your schedule.
Getting too attached to the purchase price
We all have been there. You want to purchase a stock at a certain price. So, you keep waiting for the stock to fall and eventually end up missing the train altogether.
Even Warren Buffett admitted this to be his biggest mistake when he kept waiting for Walmart's stocks to come down in the early 90s and cost Berkshire Hathaway nearly $8 billion.
It is easy to forget that if a company is a good bet at Rs 100, it is still a relatively decent bet at Rs 110.
Admitting a mistake can be tough, especially when you have put money into it. In an annual shareholder meeting of Berkshire Hathaway, Buffet once said that human beings excel at interpreting all new information in a manner that keeps their prior conclusion intact.
The argument goes, "Maybe if it can keep growing at this rate, it is a good bet... Maybe if I hold on to this just a bit longer, it will all work out."
Our need to see our prediction play out exactly as we want often clouds our judgment. We actively seek out reasons to validate our assumptions rather than trying to see where we could have gone wrong. This is why Warren Buffett recommends that you should always think like it's a clean slate.
You shouldn't put all your eggs in one basket. But you shouldn't have too many baskets either.
Buffet argues that identifying and understanding few good businesses is all the diversification you need.
Hence, a portfolio with more than 25-30 companies might not be the best idea. Investors would be far better off with an in-depth understanding of a few good businesses and diversifying across them.
Following the herd
Of all the investing sins on this list, blindly following what the majority of the market is doing might be the most common and fatal investing mistake.
Everyone is selling; what if I miss the lifeboat? Everyone is optimistic about this sector; the next mutlibagger must be hidden in there somewhere.
Howard Marks, another juggernaut of the investing world, aptly summed up the dangers of investing based on popular trends when he said, "What's clear to the broad consensus of investors is almost always wrong."
To sum up, your buys and sells should not depend on the Twitter buzz.
Venturing outside your circle of competence
Going out of your comfort zone might be helpful for self-improvement, but your portfolio doesn't need adventure to grow.
Buffett has always asked investors to only invest in businesses that they can comprehend. Sure, it might be difficult to understand every aspect of every business you put your money on. However, investing in a company simply based on metrics without a clear view of the business's revenue model or the future prospects of the sector can be disastrous to your portfolio.
All that is fine, but not everyone has the time
Us listing out investing sins might seem like we are calling out investors on their mistakes. But that is never our intent. It is daunting to fit in hours of research every day to avoid these mistakes, and we understand not everyone has the luxury of spending hours behind fundamental analysis.
This is where our stock advisory service, Value Research Stock Advisor, comes in. Our team of analysts have only one goal in mind - to guide our subscribers in their investing journey and build long-term wealth for them. We always have a list of stocks ready for you to start your investing journey, and we provide detailed coverage on each of our recommended stocks.
Let us do the research for your investing goals.
Suggested read: Timeless wisdom from Charlie Munger