Learn from Warren Buffett, the Great Teacher and the Wise Loser

In February this year, when Warren Buffett released his latest letter to his shareholders, I'd spent the weekend studying it. And I'd shared my top takeaway here.

This weekend it was again time to listen to the world's most seasoned investors - Warren Buffett and Charlie Munger - enthrall an audience of thousands of savvy investors and analysts at the latest Berkshire Hathaway AGM.

The event is nothing short of a religious festival. On this special day, Omaha transforms into the Mecca of the investing world.

Thanks to the internet, I had the opportunity to be present at the AGM and see Buffett and Munger talk live.

You can view the recordings of Berkshire Hathaway's AGM here.

During the 5-hour Q&A session, Buffett and Munger answered all kinds of questions that were thrown at them.

But there was this one moment minutes before the shareholder meeting began that really struck a chord with me.

Buffett was asked, 'What do you want to be remembered for?'

His prompt response was:

• 'As a teacher... That would be very flattering if that was written on my tombstone.
  
  Because I benefitted terrifically from teachers... not all teachers who were employed as teachers... but teachings of all kinds... People spending their time to pass on what they have learned.'

Isn't that true? Hasn't he been a fantastically inspiring teacher of value investing?

Besides being a great teacher, there's one more thing I'm always going to remember him for - for being a terrific student... a life-long learning machine.

What we can all learn from Warren Buffett is how to be humble, life-long learner.

Now, before I take you further, I'd like to know how you perceive Warren Buffett.

Do you think he's a specially gifted genius who can tell a company's future by simply looking at its annual reports... a know-it-all oracle? Do you think he's been so successful because he's always right, that he never makes mistakes? Do you think he's got some rare talent that you can't dream of acquiring ever?

I'm asking you these questions because sometimes we put successful people on such a high pedestal that we stop believing we can ever be like them. I want to shatter that myth today and show you where Buffett's true genius lies. And it's so incredibly simple that you can start following it right away.

If someone asks me what has been my greatest learning from Warren Buffett, the teacher, I'd say this: How to be good loser.

Yes, this may surprise some of you. But Buffett is no enlightened being. He's human. Like you and me. Just as flawed as any one of us.

But what has come to differentiate him is his immense ability to be a good loser and learn from every investing mistake. And in doing so, he converts every mistake into a stepping stone.

If you have noticed his writings and interviews, Buffett often talks about his mistakes, often joking about his own errors of judgment and stupidity.

Sample this...

Buffett's First Investing Mistake

In his opening remarks at the latest AGM, Buffett went back in time and spoke about the investing environment in 1942. It was the time of World War II. It was a time of gloom and doom.

At that time, the 11-year-old little Buffett saw an opportunity to buy the preferred shares of a company called Cities Service. On 11 March 1942, he bought three shares at US$38.35.

Immediately after his purchase, the stock price started to fall. Four months later, when the stock went above his cost price, he cashed in at US$40 per share.

For Buffett, this wasn't a happy ending as the stock price went to US$200 in just a few years.

This did cause the little boy much agony. But Buffett was a good loser. And this one mistake was enough for a lifelong lesson.

One of the biggest reasons for Buffett's immense success is his ability to not be moved by price swings. In fact, he doesn't even track stock prices the way most investors do. This way he sails through the ups and downs of the markets quite smoothly, and hangs on to his winning bets much longer than the average investor.

Buffett's "Monumentally Stupid Decision"

Little did Buffett know that after committing his first investing mistake in 1942, he would go on to make his greatest investing mistake two decades later.

The year was 1962. Buffett invested in Berkshire Hathaway, a failing textile company. He accumulated 7% stake in the company at US$ 7.50. His plan was to turn a quick profit and exit from the stock.

Two years later, in 1964, the textile company's owner asked Buffett the price at which he'd be willing to sell his stake. Buffett quoted US$11.50, and they both agreed.

However, the owner made a tender offer to shareholders for $11.275 per share. That was slightly lower - 2% lower to be precise - than what Buffett had asked for.

Irked by this ungentlemanly behaviour, Buffett let go of the opportunity to exit the stock. And instead he started aggressively buying more stake in the company. (Decades later, he would call this his "monumentally stupid decision".)

By 1965, he had taken control of Berkshire.

But he'd gotten himself into a business that was doomed to fail.

His stubbornness cost him a lot of time, money, and energy.

It was only two decades later, in 1985, that he finally closed the textile operation.

But like I said earlier, Buffett didn't let any of his mistakes go waste.

He owned his mistakes. And he learned from them like a humble student.

Despite his "monumentally stupid" investing mistakes, since Buffett took over Berkshire Hathaway 53 years ago, the company has grown and multiplied shareholder wealth by leaps and bounds.

Between 1965 and 2017, while the S&P 500 index registered a compounded annual gain of 9.9%, the per share value of Buffett's Berkshire Hathaway compounded at 20.9%.

It gets even more interesting when you see how that translates into the overall gain during the period.

While the S&P 500 delivered overall gains of 15,508%, Berkshire Hathaway's overall gains stood at 2,404,748%.

So, if there's one Buffett quality that I'd like you to embrace, it is to be a wise, humble loser.

Chart of the Day

There are two kinds of mistakes in investing.

There are mistakes of commission - things that you do wrongly.

And there are mistakes of omission - things that you should have done and didn't do.

For Buffett, the technology sector has been a space of big omissions. For decades, he stayed away from the technology sector.

Once when he was asked about his refrain, he had explained, 'Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles.'

So, when I first heard about Warren Buffett investing heavily in IBM earlier this decade I was quite surprised. (Unfortunately, this investment didn't work out as Buffett had expected. And now, he has fully exited the stock.)

But after closely studying him all these years, I also know very well that Buffett doesn't let past views or actions become a hindrance. He's ever learning and evolving his knowledge and views.

He has not just overcome his discomfort with technology stocks, but he is now betting big on the sector. Yes, his top holding right now is a technology company - Apple Inc.

Over the last two years, Buffett has been aggressively buying shares in Apple Inc and now controls 5% stake. In fact, Apple Inc now constitutes 21% of Berkshire Hathaway's public stock holdings.

After Late Entry, Warren Buffett Makes Apple His Top Holding

But, as you can see in the chart, Buffett has been quite late to enter the bus.

Had he bought the stock 20 years ago, he'd be sitting on a massive 177-bagger.

I know many people who wouldn't buy a stock simply because they had seen it at a fraction of a price. And they would keep cursing themselves for such missed opportunities.

But what I like about Buffett is that he doesn't let past errors of omission stop him from making investments now.

Happy Investing,

Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

PS: Rahul Shah, is also the editor of Microcap Millionaires, the market-beating Graham-inspired service. Rahul's service has a long track record of picking winner after winner - of the last 16 positions closed, Rahul has delivered a winner 100% of the time.

And now for the good news - he will be releasing his next stock recommendation tomorrow - and this next one will likely go on to be a massive hit as well. Stay tuned for the Microcap Millionaires recommendation report releasing tomorrow in your inbox.