Investing July 2, 2007, 12:01AM EST
Visit The Share Investor Blog
The ability of the "Oracle of Omaha" to recognize and learn from his missteps is one of his greatest strengths as an investor
But the country's most famous investor has made some infamous mistakes, too. Buffett's blunders offer their own lessons to investors trying to emulate the "Sage of Omaha."
"He might be the best in the business, but his batting average is far below 1,000," said Timothy Vick of Sanibel Captiva Trust, author of How to Pick Stocks Like Warren Buffett.
A key lesson, Vick said: "You have to learn from every mistake and keep them isolated and keep them small." Buffett is open about his investing missteps, often detailing them in his annual letter to Berkshire shareholders. He usually takes all the blame himself, shielding his underlings and his business partner, Charlie Munger.
Dwelling on Failure
After 1999, a tough year for Berkshire, he wrote: "My performance reminds me of the quarterback whose report card showed four Fs and a D but who nonetheless had an understanding coach. 'Son,' he drawled, 'I think you're spending too much time on that one subject.'"
This willingness to dwell on failures may be the biggest lesson from Buffett's mistakes, said Mark Thompson, an executive coach who co-wrote Success Built to Last. "Everyone is told to learn from failure," notes Thompson, "but how many people really do that?" Buffett has learned how, and has the multi-decade track record to prove it.
A key to investing well is a willingness to look stupid, Buffett says. "Most managers have very little incentive to make the intelligent-but-with-some-chance-of-looking-like-an-idiot decision," Buffett wrote in 1984. Most would prefer "failing conventionally." He added: "Lemmings may have a rotten image, but no individual lemming has ever received bad press."
At times, Buffett has looked like an idiot to others. In 1999, when tech stocks were taking off, Berkshire's stock and earnings were stagnant. Buffett avoids technology companies, whose products he says he doesn't understand. That later paid off when the tech bubble burst.
"People like Warren don't fuss over the status issue," Thompson said. They change their minds for good reasons, not because public opinion changes.
Waiting for the Right Opportunity
The biggest mistakes for any investor can be mistakes of omission, investments not made that could have performed spectacularly. But Vick says investing like Buffett requires patience. It's O.K. to pass up those ideas from time to time. "You don't have to chase everything," Vick said. It's better to wait for the right opportunity than to jump on every fad.
When you realize you've made a mistake, what next? Buffett's record suggests it sometimes makes sense to cut your losses. He shut down a failing textiles business in the mid-1980s, for example. But often Buffett sticks with his mistakes, even after he admits they were bad ideas to begin with. An investment in USAir (LCC) was nearly wiped out in the '90s, but Buffett held on until it recovered again. "Time erases a lot of mistakes, especially when you're investing in a decent business that can grow," Vick says.
The occasional investing failure is inevitable. Even the best money managers screw up, and even the worst get lucky. Keep this in mind when choosing someone to manage your money, Vick advises. "You want someone who acknowledges mistakes and is humble about successes," he said. Kind of like the Sage himself.
Steverman is a reporter for BusinessWeek's Investing channel.