Legendary investor Warren Buffett has a lot to teach people. Not only is that because of his successful stock investing history. It is also because he is very open. For example, instead of just talking about his successes, he is willing to dissect his failures in public. He quite frequently talks about his biggest mistakes.
What may be surprising is that those mistakes are things he didn’t do. Buffett has made what he calls “mistakes of commission”, such as investing in Tesco even as warning signs emerged of an accounting problem (since resolved). But he reckons his biggest errors have been “errors of omission”. In other words, he erred by missing out on investments he had the knowledge to make comfortably – but didn’t.
As Buffett said at the 2001 shareholders’ meeting of his company, Berkshire Hathaway, “The mistakes that have been most extreme in Berkshire’s history are mistakes of omission. They don’t show up in our figures. They show up in opportunity costs”.
Buffett repeats his mistakes
Having recognised that two decades ago, has Buffett stopped making mistakes of omission?
The answer is clear looking at how long Buffett took to buy Apple, now Berkshire’s biggest shareholding. He didn’t start buying the stock until 2016. Even in 2012, for example, he told an interviewer, “I’ve never bought Apple: I wish I had”. Buffett’s investment in Apple has reaped tens of billions of dollars in reward – but if he had invested earlier he would have done even better.
What distinguishes Buffett’s thinking here from that of a pub bore saying he ought to have invested in Apple or Amazon when it was a small company is that Buffett isn’t simply lamenting great investments he didn’t make. He is too smart for that. Instead, he is specifically focussed on good investments he failed to make when he already had enough knowledge about a company’s prospects to do so.
As a private investor, what can I learn from Buffett’s thinking on these mistakes of omission?
Applying Warren Buffett thinking to my portfolio
One thing I’ve learnt from Warren Buffett’s thinking is trying to spot when I am onto a good thing. For example, I held back on investing in S4 Capital when I already had sufficient confidence that the company’s business model was attractive. So when I did buy shares the price had risen a lot.
But having procrastinated, once I did decide to move on S4, I soon topped up my investment, rather than just investing a little and lamenting further missed opportunity as the share price grew. S4 has risks – for example, its heavy tech exposure could mean revenues and profits fall if there is a tech pullback. But once I had the confidence to invest in it, I didn’t just dip my toe in the water and then wish later I had invested more.
How can I spot such mistakes of omission as they occur, with an eye to avoiding them? I think this can be achieved by regularly reviewing my portfolio and my watchlist of shares. In doing this, I ask myself the simple question, “Am I missing out on a great opportunity here by not taking action right now?”
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Christopher Ruane owns shares in S4 Capital. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool UK has recommended Tesco and has recommended the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.