“Learn from the mistakes of others. You can’t live long enough to make them all yourself. ” – Eleanor Roosevelt
In life and investing there are many opportunities to make mistakes. If we carefully observe others and learn from their mistakes, we can avoid a lot of grief and loss. However if one of the legends in investing offers to expose his mistakes and distill the lessons he has learnt, it will be foolish not to pay attention.
In his annual letter to shareholders of Berkshire Hathaway (1989) Warren Buffet has graciously described his mistakes in the past 25 years ( as of 1989) and the lessons other investors can learn from those mistakes. I had summarized those lessons for my reference in my notes. I found it useful and hence decided to publish them in this post.
Lessons from 25 mistakes in the past – Warren E Buffett
Time is the friend of the wonderful business, the enemy of the mediocre
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price
when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact
In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.
- -Problems are inevitable in business, but according to Buffet seeking business or investments with challenging problems in the hope of buying it cheap in the hope of a turn-around ( by fixing the problem ) usually ends badly.
- He sums it up in his 1989 letted to shareholder as follows – “Overall we’ve done better by avoiding dragons than by slaying them.”
Institutional Imperative : Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided.
Rationality frequently wilts when the institutional imperative comes into play. Ill-effects of Institutional Imperative
- (1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction;
- (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds;
- (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and
- (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.
You never succeed in making a good deal with a bad person – invest in business with good moat and run by people you admire and trust.
Errors of Omission – Once you know the right thing to do – Do it!
A small chance of distress or disgrace cannot be offset by a large chance of extra returns. Avoid leverage as much as you can