In this video, you’ll learn about 12 of the biggest mistakes that almost every investor makes, according to Warren Buffett. I’ll admit a few of my own investing sins along the way to be a good sport. This is the Swedish Investor, bringing you the best tips and tools for reaching financial freedom, through stock market investing.
1. Timing the Market Charlie and I don’t think about the market. And Ben didn’t very much either.
I think he made a mistake to occasionally try and place a value on it. We look at individual businesses. But the stock market — I know of no one that has been successful at — and really made a lot of money predicting the actions of the market itself.
I know a lot of people who have done well picking businesses, and that’s what we’re hoping to do. Focusing too much on what the general stock market is doing is one thing that Warren Buffett considers a great mistake, one so easy to commit that even his investing role model Benjamin Graham was doing it. Why is predicting market movements so alluring?
The tide of the ocean can both raise and sink all ships. You successfully identified a great stock but got clobbered because Covid struck. Then you found another awesome company only to face rising interest rates, inflation, and war.
What the hell? ! I think this is why trying to predict what happens on a macro level in the economy is so alluring.
We want to buy the dips and sell the highs, it sounds so easy, right? Warren Buffett says that one must only focus on two things in life. The important and the knowable.
Where the market is heading sure is important, but is it knowable? I don’t know what interest rate hike Jerome Powell will announce during FED’s next policy meeting. Heck, I don’t even think that Jerome Powell himself knows that!
And that’s just 1 of maybe 100 variables that are important for where the market is heading. So, what is Buffett doing instead? He is focusing on what is both important AND knowable - identifying superior companies at fair prices.
Recognizing that a ship is superior is a lot easier than predicting every storm that may come far, far into the future. Sometimes there will be hurricanes and thunder and one of your ships may sink, but at other times your ships will have the wind in their back. Trust that, over time, you’ll do well by betting on the best boats.
2. Getting Attached to Your Purchasing Price A stock at 50, somebody’s paid a hundred, they feel terrible. Somebody else paid 10, they feel wonderful.
All these feelings, and it has no impact whatsoever. Have a look at this graph which represents the share price of Amazon during the last 5 years. Arnold purchased the stock in June 2022, and he is now sitting on a nice 5% return.
Not too shabby, he probably feels pretty good about himself considering that was only some 4 months ago. On the other hand, Ben purchased the company in July 2021, and he has lost 38%. And then there’s Catie who purchased Amazon 5 years ago, and she is now sitting on a nice 133% return.
Now to the million-dollar question … does this all matter? Should Arnold, Ben and Catie treat Amazon’s stock differently because of when they purchased the company? Maybe Arnold and Catie should sell to “secure a profit” while Ben should wait to “break-even”?
Presented like this, I think it is quite easy to see that the answer to this question is NO. The only thing that matters for today’s decision – selling or keeping Amazon – is how the company is likely to perform in the future. After all, if Amazon sells for 50% more in a year, Arnold, Ben and Catie will all make a 50% profit from today’s level.
They are not treated differently. The mistake here is that many investors tend to get attached to their purchasing price. The stock of Amazon doesn’t give a damn about your purchasing price.
Stocks do not show empathy, they treat investors who have lost 38% on their holding and those that have gained 133% exactly the same going forward. Warren Buffett thinks you should always pretend that you always have a blank slate. You’ll soon hear about a sibling to this mistake, a mistake that Buffett calls “his biggest mistake by far”.
3. Aggressive Growth Projections I think it’s a mistake for any company to predict 15% a year growth. But plenty of them do.
Very, very few large companies can compound their earnings at 15%. It isn’t going to happen. Have you ever thought to yourself: “Hmmm … this stock looks quite expensive, but if it can just keep growing its earnings like this, it will soon be a bargain!
” I sure have. Many companies with high valuations in the stock market try to defend their share price by forecasting astonishing growth. But as Buffett points out, expecting very high growth rates is a mistake.
I’m certainly not advising that you should stay away from growing companies. Buffett loves to invest in companies that can grow, especially if they can do so without the need for too much capital. But growth at any price, which has been the mentality on Wall Street during these times of low interest rates, that’s a trap.
Any time you purchase a stock at, say, 20 times earnings or more, you need earnings to grow quite drastically to achieve a nice return. And as Buffett points out, this is not so easy to do. Among S&P 500 companies from 2012 that still exist under the same ticker symbol today, only 40 companies managed to grow at 15% or more.
That’s about 1 in 10. It’s very difficult to pick out a 1-in-10 company. Investors in the Teslas, Intuits, and NVIDIAs of the world, beware.
4. Using a lot of Leverage Really, the only way a smart person that’s reasonably disciplined in how they look at investments can get in trouble is through leverage. I mean, if somebody else can pull the plug on you during the worst moment of some kind of general financial disaster, you go broke.
And Charlie and I both have friends that have — where that’s happened to them. Using a lot of leverage is the financial equivalent of playing Russian roulette. “Sure!
I’ll gladly accept a 1/6 risk of blowing my brains out. ” Investing really isn’t a game that was created for the impatient. And nothing screams desperate like a portfolio full of borrowed money.
Except maybe really playing Russian roulette … Why is leverage so dangerous? It’s because if you are borrowing money, you can be right about something, but you’re not allowed to play your hand, so you’ll lose anyways. Let me explain.
Harry the hedge fund manager decides to short GameStop on March 15, 2022. When Harry is shorting GameStop, he is still using leverage, but he is borrowing shares instead of cash. Warren Buffett hates shorting for the same reason that he hates most leverage.
Harry borrows and sells shares worth $1 million and deposits $500,000 in initial margin requirement, something the broker wants him to have in the account because they want to be sure that he could return those shares in the future. GameStop is valued at no less than 20x its best-performing year in a decade, and the business has been facing a terrible headwind during the last 5 or 6 years. In other words, Harry is sitting on a pretty good hand, maybe not pocket aces, but perhaps pocket queens?
Well, no matter, he is never going to be allowed to play that hand. Just a week later, the shares in GameStop climbs from $19 to $31 per share. Harry now owes his broker more than $1.
6 million in GameStop shares plus he needs to put up something called maintenance margin requirement, in total around $2. 1 million. This is when his broker issues a margin call of $600,000, money that Harry must transfer to his account for the broker to be comfortable keeping the position.
SHOW ME THE MONEY! Harry adds this money, but just a week later, the shares sell for $47. He now owes his broker almost $2.
5 million in GameStop shares, and you guessed it, they issue another margin call. SHOW ME THE MONEY! This time, it’s for $1.
1 million, which is more than Harry can afford. So instead, he is forced to buy back shares, and he decides to close the whole position at a $1. 5 million loss.
In my opinion, the share of GameStop is trading at way too high levels currently, and I think that the imaginary Harry will be proven right, eventually. But because he used leverage, he is never going to be able to profit from that prediction. 5.
Missing the Forest for the Trees We’ve made plenty of mistakes in acquisitions. Plenty. But the mistakes are always about making an improper assessment of the economic conditions in the future of the industry of the company.
They’re not a bad lease. They’re not a specific labor contract. They’re not a questionable patent.
Those are not the things that count. Three things. The future economics of the business & industry.
The management. The price. If you get these three things right, you don’t have to worry about every detail of a business.
Warren Buffett is said to be able to make a deal in 15 minutes. This is of course partly an effect of tons and tons of business experience, but it is also because he likes to keep things simple. In 15 minutes, he can’t possibly understand every detail of a business, the typical “due diligence” that investment bankers and management consultants spend endless hours on, but he can decide on the previous three.
And at the end of the day, that’s what counts. Get caught up in too much detail and you might miss the forest for the trees. This is probably the mistake on this list that I myself find the most difficult currently.
I just spent just over a month researching different stock market companies, and because of that, I was not able to release any videos for you guys on this YouTube channel. It might be that I’m getting bogged down in too much detail. However, if there’s one thing I’ve learned, it’s that it’s great to have a bottom-up approach, meaning that I sometimes do quite a bit of detailed analysis, but then I try to summarize that information for myself in the end.
For example, this is what maybe a day or so looking at a Swedish kitchen producer called Nobia ended up looking like. I’ve tried to give each of my categories - growth, business and management - a 1-5 grade while just jotting down the most important stuff in each category. This, together with a graph representing the cash flows of the company and what I think the company is currently yielding, gives a great representation of the opportunity it presents, I think.
Then I just compare this with the other companies that I’ve analyzed and pick out the ones that I think have the greatest prospects. 6. Jumping Over 7-Foot Bars Some businesses are a lot easier to understand than others.
And Charlie and I don’t like difficult problems. I mean, we’d rather multiply by three than by pi. I mean it’s just easier for us.
Some people think that if you jump over a seven-foot bar that the ribbon they pin on you is going to be worth more money than if you step over a one-foot bar. And it just isn’t true in the investment world, at all. I think committing this mistake is so common because it completely goes against what success means in many other endeavors of life.
Climbing impossible mountains, jumping impossible heights, solving impossible equations, you name it. Everywhere else you are rewarded for doing the difficult stuff, but in the investment world, it just isn’t so. Doing complicated mathematical acrobatics or difficult predictions about the future of industries is not only not rewarding but often disastrous for investment results.
Just ask the math geniuses and Nobel laureates at Long-Term Capital Management. This relates back to the mistake of missing the forest for the trees. If you can find a company with favourable industry and business prospects, where the management is honest and hardworking, and you don’t pay too much for that business, you are bound to do well.
Simple ideas yield exceptional results in the long run in the investment world. 7. Shrinking Your Universe of Opportunities We think the most logical fund is the one we have at Berkshire where, essentially, we can do anything that makes sense and are not compelled to do anything that we don’t think makes sense.
I think it’s a mistake to shrink the universe of possibilities. Ours is shrunk simply by size, but we don’t set out to circumscribe our actions in any way. I’ve been fishing for most of my life because my father is a great fishing enthusiast.
One thing that I’ve noticed my father doing is that he never spends too much time in the same place. If it doesn’t yield any fish, he moves on to another spot. Had he been stubborn or narrow-minded, trying to fish in the same spot all day, well, the result would probably have been much less fish.
The same holds true for investing. Opportunities do not stay in the same place for too long, and one never knows where they will show up next. Therefore, it pays to have an open mind and not shrink your universe of possibilities to, say, a single industry or sector.
Many funds do this, by, for example, only focusing on ESG types of companies, only focusing on high dividend paying companies only focusing on Swedish companies, only focusing on crypto, or what have you. Opportunities don’t work like that. And frankly, I think that the fund managers know this too, it’s just that it’s easier to market and sell their products when they are niched.
Something I’ve never told before is that I almost made this mistake when creating this channel. I considered naming it “The Gaming Investor” instead of The Swedish Investor, because for a moment I was thinking about only focusing on companies in the gaming industry. My reasoning was that I would create a really solid circle of competence within that field, but it would have been too narrow of a field.
There’s a difference between staying within your circle of competence and being small-minded. Opportunities can pop up anywhere, and, ironically, they tend to move away from where people think they are to where people think they can’t possibly be because it is people who decide the prices of stocks. This, we shall get back to really soon.
8. Staying Active all the Time If you feel you have to invest every day, you’re going to make a lot of mistakes. It isn’t that kind of a business.
You have to wait until you get the fat pitch. Who do you think is most likely to succeed? The tennis player who plays 5 games a day or the one that plays 5 games per year?
The author who writes 5 times per week or the one that writes 5 times per year? The investor who buys 5 stocks per week or the one that buys 5 per year? Investing is one of those rare exceptions where inaction is rewarded.
You can’t buy the equivalent of a Coca-Cola at a fair price every day, it just doesn’t work like that. There are extensive bear markets where opportunities are plentiful and there are bull markets where opportunities cannot be found no matter how many rocks you turn. And sometimes, there are opportunities, but they are just not within your circle of competence.
Buffett says that an investor must behave like a baseball player who cannot possibly strike out. You don’t swing at every ball that is thrown at you that’s just a recipe for some really awful misses. No, you must wait for the “fat pitch”.
9. Diversifying too Much If you really know businesses, you probably shouldn’t own more than 6 of them. I mean, if you can identify 6 wonderful businesses, that is all the diversification you need and you are going to make a lot of money and I can guarantee you that going into a 7th one, instead of putting more money into your first one … it’s gotta be a terrible mistake.
Very few people have gotten rich on their 7th best idea. But a lot of people have gotten rich on their best idea. Diversification is a hot potato among investors.
I’ve discussed this on multiple occasions already, so I’ll be quite short here and point you to this other video if you want to go more in-depth on the topic. It basically boils down to this - if you are not willing to read up on individual companies on a regular basis, you should diversify. Probably buying something like an index fund to protect yourself against a lack of knowledge.
But if you are what Buffett calls a “know-something investor”, someone who enjoys staying up to date with specific businesses and industries, you should leverage this knowledge to achieve above-market returns. If you buy the 30 largest companies of the S&P 500, you shouldn’t expect to perform much differently from the index people. An analogy comes to mind.
When I was younger there were some who thought that mixing 40% liquor with 30% liquor must make the resulting “cocktail” even stronger. Maybe even 70%? This is of course silly, adding anything weaker than 40% to the 40% one will only dilute the result.
Just like adding your 7th best stock pick will dilute the performance of your top 6 portfolio. For the sake of transparency, I currently own 10 stocks myself and I think that investors will forever debate what the “perfect” number is. 10.
Confirmation Bias There’s no question, the human mind — what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact. That is a talent everyone seems to have mastered. Charlie and I have made big mistakes because, in effect, we have been unwilling to look afresh at something.
You know, that happens. Charlie Munger has an analogy about this that I think is quite funny: “[W]hat I’m saying here is that the human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in.
” As an investor, this is a very costly mistake to make. We loooove to interpret and seek out new information so that our prior conclusions remain intact, when, what we should be doing is the exact opposite. We must try to stay rational and weigh the pros and cons for all of the companies that we keep in our portfolio.
I’ve had a very hard time with this historically, but I think that I’ve found two antidotes – the “Darling Killing Funnel” and the “Bear Pill” Say that you have decided to keep 10 companies in your portfolio. Then you should have at least 20 candidates before you decide on which 10 to keep. These 20 aren’t companies that you just sweep by, no, these are companies like my Nobia that you spend perhaps a day or so researching.
If you follow this advice, you’ll be forced to kill some of your darlings, and you’ll be much more rational as a result. If you are taking the Bear Pill you are committed to, before adding any company to your portfolio, making a very intentional choice to seek out the potential pitfalls of that investment. Or maybe hire a friend who’s willing to play devil’s advocate.
11. Following the Herd Humans will continue to make the same mistakes that they have made in the past. They get fearful when other people are fearful.
When they get greedy, they get greedy en masse, too. That’s where Charlie and I have an edge. We don’t have an edge, particularly, in many other ways.
But we are able, perhaps better than most, to not really get caught up with what other people are doing. As you’ve probably observed by now, investing is full of things that are counterintuitive, just like the mistake of jumping over 7-foot bars and staying active all the time. In many, many things in life, it pays to listen to the crowd.
If your parents and friends like your girlfriend, she’s probably a pretty good partner. If a lot of people like a particular movie, chances are higher that you’ll enjoy it too. If people are really jealous about your career, it means you are probably doing pretty good for yourself, unless there’s something that you’re not telling them, of course.
Well, not so with investing. In fact, if your parents and all your friends agree with the most recent stock that you recommended, it probably means that you should not buy it. As another excellent investor, Howard Marks puts it: "What’s clear to the broad consensus of investors is almost always wrong.
" How can this be? It’s because there’s no such thing as a good idea regardless of price. Sure, Tesla may take over the automotive industry, but it’s not going to be a good investment if it’s already priced as high as the whole automotive industry.
If there’s one situation where I think people are extra vulnerable to following the herd right off a cliff, it is when others, worst case their close friends, are getting rich doing something that looks easy. This is my biggest investing mistake so far. I put quite a bit of money in a small startup that a friend had gotten rich investing in.
The company wasn’t in my circle of competence, but I threw my hard-earned money after it nonetheless, because his returns were so alluring, and I also knew he was involved in the company. The jury is not out yet, but if this doesn’t turn out to be my costliest mistake so far, I’m just dumb lucky. 12.
Omissions The biggest mistakes we’ve made, by far, are mistakes of omission and not commission. I mean, it’s the things that I knew enough to do, they were within my circle of competence … and I was sucking my thumb. I’ve probably cost Berkshire at least $5 billion, for example, by sucking my thumb 20 years ago when Fannie Mae was having some troubles and we could’ve bought the whole company for practically nothing.
Pretty much every mistake on this list so far has been mistakes of commission – you take some sort of action to create them. However, as Buffett points out, sometimes the biggest mistake of all is not to do something. You know … not asking that girl that you are interested in if she wants to go on a date with you.
Never taking a risk in your career. Or, as in Buffett’s case – not investing in something that was a given. This mistake is extra annoying if it is combined with one that we’ve talked about before – getting attached to your purchasing price.
Buffett has often mentioned that this happened to him with Walmart. He was acquiring a stake in the company, I think it was in the early 90s, but the price of the share ran away a little. Of course, if you think that a company is a great opportunity at $X, it is probably still a good opportunity at $1.
1X, but Buffett’s mind was attached to the first price he got, and he hoped the stock would come down again. It never did. Buffett has said that this mistake cost Berkshire Hathaway about $8 billion in would-be profits.
He nearly made this same mistake with one of his greatest investments of all time, See’s Candy, but on that occasion, Charlie Munger managed to convince him otherwise. Of course, hindsight is always 20/20, but when something is within your circle of competence and you’ve identified it as an opportunity you don’t just stand there or nibble at it. You take a full bite.
These are the 12 deadly sins of investing. But perhaps you have another one up your sleeve? Help your fellow investors by sharing your experience in the comments.
Also, if you want to hear more about Warren Buffett’s most important investments of all time, check out this video. Cheers guys!
