Warren Buffett’s investment career has been analysed from a variety of angles. However, it often takes the form of discussing all of the things he has done correctly in his career, rather than focusing on his avoidance of mistakes.
On that topic, the man himself is quoted as saying “you only have to do a very few things right in your life, so long as you don’t do too many things wrong.” In other words, reducing the number of mistakes you make can lead to greater success than focusing on how to invest correctly.
With that in mind, here are some areas where investors may wish to focus their efforts in order to avoid making mistakes. Doing so could boost returns in the long run.
Almost all investors have felt impatience towards one or more stocks in their lifetimes. This could be because the company in question has not yet delivered the level of return they were expecting, or may be down to a lack of growth in the wider economy that has impacted negatively on their portfolio returns.
Either way, being impatient about stocks or the economy could hurt portfolio performance. It may lead to snap decisions which prove to be incorrect. Clearly, all investors would like to generate high returns in a short period of time. However, the economy generally moves at a slow pace, while it can take time for changes in company strategy to have an impact on financial performance. And even if a business is performing well, investors may take time to become more positive about its prospects. As such, adopting a long-term view on investing could be a sound idea.
While taking risk can lead to high rewards in the long run, taking too much risk can lead to huge disappointment for an investor. Clearly, every investor has their own unique level of risk tolerance, and exceeding it can lead to disillusionment with the idea of investing in shares. For example, an investor may decide that the resources sector holds significant growth opportunity. But if commodity prices fall and they are over-exposed to the industry, they could see the value of their portfolio decline.
As such, it may be prudent for investors to take risk, but for it to be balanced and well within their comfort zone. Even for investors with long-term time horizons who consider themselves to be less risk-averse, holding some assets that offer high levels of liquidity and stability could be a worthwhile move.
Warren Buffett appears to have overcome the potential mistakes of becoming impatient and a lack of risk management. His favourite holding period is apparently ‘forever’, while he generally invests in stocks that have wide economic moats as well as a long track record of rising levels of profitability.
In fact, most of his major holdings are mainstream stocks which do not appear to be particularly insightful purchases. But by avoiding most of the errors that many of his peers make, Buffett’s returns continue to be exceptionally high.
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