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Lessons from Warren Buffett - LIX

Sep 28, 2015

In the previous article, based on Buffett's 2007 letter to shareholders, we discussed the various aspects that he looks for in a business before investing in them. Let's now move forward to his wisdom from the 2008 letter. Here, Buffett submits some of his mistakes, what he learned from them and some of his views on markets.

Modestly, Warren Buffett confessed the following mistakes to his shareholders:

  1. Buying a large amount of Conoco Philips without regard to timing.
  2. Buying two Irish banks without concern for fundamentals because he was attracted to their cheap prices.

On the first mistake, he wrote:

  • Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current US$40-50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

On the second matter, Buffett admitted:

  • I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent US$ 244 million for shares of two Irish banks that appeared cheap to me. At yearend, we wrote these holdings down to market: US$ 27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes 'unforced errors'.

Even the master can be swayed by emotion and overlook timing and fundamentals. However, what makes Buffett remarkable is his recognition of these mistakes - and the lessons he learns from them. Moreover, he understands that the mistakes make him a better decision maker: 'If you don't make mistakes, you can't make decisions.'

The lessons from this letter are simple:

Learn from your mistakes

Fail better. Learn from your investing mistakes. You won't become wealthy by repeating mistakes.

Don't overlook fundamentals

Keep in mind the valuations and management of the business when you buy a stock. More importantly, if the underlying stock is cyclical in nature, it is vital to ensure that you aren't buying at the cycle top.

Avoid market folly

Everything else is child's play if you can avoid allowing the clutter that markets throw at you every day to influence your decision-making. Rather than let it control your emotions, use volatility to your advantage. As Buffett says in this same letter: 'When investing, pessimism is your friend, euphoria the enemy.'

Rahul Shah

Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.


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