Warren Buffett: 9 Mistakes Every Investor Makes

Warren Buffett is without a doubt the most well-known and highly respected investor on the planet. He bought his first stock at just 11 years old, and now at 91 years old, that means he has been investing for 80 years. During that time, Buffett has made his fair share of mistakes that he openly talks about. Even more importantly, he has learned from the foolishness of others, so he doesn't repeat that behavior.

In this video, we are going to go over the 9 mistakes Buffett says investors make and how to avoid them. Let's jump right in. I have an old-fashioned belief that I can only expect to make money in things that I understand. And when I say understand, I don't mean understand, you know, what the product does or anything like that. I mean understand what the economics of the business are likely to look like 10 years from now, or 20 years from now.

I know in general what the economics of, say, Wrigley Chewing Gum will look like 10 years from now. The internet isn't going to change the way people chew gum; it isn't going to change which gum they chew. You know, if you own the chewing gum market in a big way and you've got Double Mint, Spearmint, and Juicy Fruit, those brands will be there ten years from now. So, I can't pinpoint exactly what the numbers are going to look like on Wrigley, but I'm not going to be way off if I try to look forward on something like that.

Evaluating that company is within what I call my circle of competence. I understand what they do, I understand the economics of it, I understand the competitive aspects of the business. There can be all kinds of companies that have wonderful futures, but I don't know which ones they are.

I was just wondering, what would you consider to be the worst investment you've ever made?

The worst investment I ever made, the biggest mistakes are the ones that actually don't show up. They're the mistakes of omission rather than commission. We've never lost that much money on any one investment. But it's the things that I knew enough to do that I didn't do. We have missed profits of as much as, you know, maybe 10 billion dollars in things that I knew enough to do, and I didn't do it.

Unless you find the prices of a great company really offensive, if you feel you've identified it—and by definition, a great company is one that's going to remain great for 30 years—it's going to be great for three years; you know it ain't a great company. I mean, it is. So, you really want to go along with the idea of something that, if you were going to take a trip for 20 years, you wouldn't feel bad leaving the money in with no orders with your broker and no power of attorney or anything. You just go on the trip and you know you come back and it's going to be a terribly strong company.

I think it's better just to own them. I mean, we could attempt to buy and sell some of the things that we own that we think are fine businesses, but they're too hard to find. I mean, we found See's Candy in 1972. We find here and there. We get the opportunity to do something, but they're too hard to find.

So, to sit there and hope that you buy them in the throes of some panic— you know, that you'd sort of take the attitude of a mortician, you know, waiting for a flu epidemic or something. I mean, I'm not sure that's going to be a great technique. You know, I think if you like the business and you like the person who's coming to you and the price sounds reasonable, you really know the business, I think probably the thing to do is to take it and don't worry about how it's quoted.

It won't be quoted tomorrow or next week or next month, and I think people's investment would be more intelligent if stocks were quoted about once a year, but it isn't going to happen that way.

So, I went in the U.S. Air; I bought a preferred stock in 1989. As soon as my check cleared, the company went into the red and never got out. I mean, it was really dumb. I mean, I've got an 800 number I call now whenever I think about buying an airline stock. I call them up any hour. Fortunately, I can call them at three in the morning and I just dial and I say, "My name's Warren, I'm an aeroholic, you know, and I'm thinking about buying this thing." And they talk me down. I mean, it takes hours sometimes, but it's worth it, believe me.

If you ever think about buying an airline stock, call me and I'll give you the 800 number because you don't want to do it. The country will do very well over time, but you will see these huge waves. If you can stay objective throughout that—if you can detach yourself temperamentally from the crowd—you get very rich, and you won't have to be very bright. I mean, I'm sure you are, but it doesn't take brains; it takes temperament. It takes the ability to sit there and look at something.

When I started out in 1950, I would go through and find things at two times earnings, and they were perfectly decent businesses. People wanted jobs at those companies, and everybody knew they were going to be around. They wouldn't buy them at two times earnings, and that's when interest rates were two and a half percent.

You know, I went to the— I started selling securities when I was 21, and a Kansas City Life Insurance Company happened to be a fairly prominent company in Omaha. The policies they sold you, if you were buying life insurance from them, had a built-in assumption of two percent interest. The stock of Kansas City Life was selling at less than three times earnings. You're getting 35 percent if you bought the stock; no question about the soundness of the company.

I went to the local agent. I thought, "Hell, I'll be able to sell him a few shares of stock." I mean, the guy— I understand he's got his whole life invested in this company. I want the local agent; we've been with him for 20 years, and his name was Moose. I said, "Mr. Moose, I said you know you're selling these policies with two percent. You may even have a few members of your own family, and you can buy into this company whose paycheck you depend on every month and whose future your beneficiaries of these life policies depend on, and who you're selling them, you know, two percent investment on, and you get 35 percent on your money."

Yeah, you know, stocks aren't any good. And I couldn't tell you; you know, I was a lousy sales— but I mean, well, you have to start with that, but it just blew me away. It blew me away. I thought sometimes I used to wonder if I was nuts. You know, we don't do very many things, but when we get the chance to do something that's right and big, we've got to do it.

And even to do it in a small scale is just as big a mistake almost as not doing it at all. I mean, you've really got to grab them when they come because you're not going to get 500 great opportunities. You would be better off if, when you got out of school here, you got a punch card with 20 punches on it, and every big financial decision you made you used up a punch. You'd get very rich because you'd think through very hard each one.

He went to a cocktail party and somebody talked about a company he didn't even understand what they did or couldn't pronounce the name, but they made some money last week, and another one like it. You wouldn't buy it if you only had 20 punches on that card.

There's a temptation to dabble, particularly during bull markets. In stocks, it's so easy. You know, it's easier now than ever because you can do it online. You know, just you click it, then, and maybe it goes up a point and get excited about that, and you buy another one the next day, and so on. You can't make any money over time doing that.

But if you had a punch card with only 20 punches, you weren't going to get another one the rest of your life; you would think a long time before every investment decision, and you would make good ones, and you'd make big ones, and you probably wouldn't even use all 20 punches in your lifetime, but you wouldn't need to.

And the question we get most frequently from people about you coming on is, what should they be buying right now? So, if I say buy, you say— I say basically hold. I mean, the idea that the European news or a slowdown in this or that or anything like that, that would not cause you— if you owned a good farm and had it run by a good tenant, you wouldn't even sell it because somebody said, "Here's a news item." You know, this is happening in Greece or something of the sort.

If you owned an apartment house and you got to raise your rents a little as well located, you had a good manager, you wouldn't dream of selling it. If you had a good business personally— the local McDonald's franchise— you wouldn't be thinking about buying or selling it every day.

Now, when you own stocks, you own pieces of businesses, and they're wonderful business. You can pick the best businesses in the world. To buy or sell on current news is just crazy. You're in a wonderful business; you've got people running it for you. You know you're going to do well over five or ten years, and to think news events should cause you to try and dance in and out of something that's a wonderful game is a terrible mistake.

So, get into a bunch of wonderful businesses and stay with them. Investors behave in very human ways, which is they get very excited during bull markets, and they look in the rearview mirror and they say, "I made money last year; I'm going to make more money this year, so this time I'll borrow."

Or the neighbor says, "You know, I wasn't in last year when that neighbor was dumber than I made a lot of money, so I'm going to go in this year." So, they're always looking in the rearview mirror, and when they look in the rearview mirror and they see a lot of money having been made in the last few years, they plow in, and they just push and push and push on prices.

When they look in the rearview mirror and they see no money having been made, they just say, "This is a lousy place to be." So, they don't care what's going on in the underlying business, and it's astounding, but that makes for a huge opportunity—just a huge opportunity.

I mean, I've lived through roughly half— in an investing sense— about half that period, and I've had that long period of stagnation from '65 to '80, 17 years. I wrote an article for Forbes in 1979. I just said, "How can this be? Pension funds in the 1970s put 100 percent of their new money in stock because they were wild about stocks. Then they got a lot cheaper, and they put a record low, 9 percent of their money, in 1978, when stocks were way cheaper."

People behave very peculiarly in terms of their reactions because they're human beings, and they get excited when others get excited. They get greedy when others get greedy; they get fearful when others get fearful, and they'll continue to do so. You will see things you won't believe in your lifetime in securities markets.

Well, I mean, I've made a lot of mistakes. The biggest mistake— well, not necessarily the biggest, but buying Berkshire Hathaway itself was a mistake because Berkshire was a lousy textile business, and I bought it very cheap. I'd been taught by Ben Graham to buy things on a quantitative basis, look around for things that are cheap, and I was taught that, say, in 1949. They made a big impression on me.

So, I went around looking for what I call "used cigar butts" of stocks, and the cigar butt approach to buying stocks is that you walk down the street and you're looking around for cigarette butts, and you find this honestly this terrible-looking soggy ugly-looking cigar with one puff left in it, but you pick it up and you get your one puff—disgusting—you throw it away, but it's free. I mean, it's cheap, and then you look around for another soggy, you know, one puff cigarette.

Well, that's what I did for years. It's a mistake. Although you make money doing it, you can't make it with big money. It's so much easier just to buy wonderful businesses. So now, I would rather buy a wonderful business at a fair price.