Warren Buffett on investment mistakes

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You can find plenty of information online to avoid investment mistakes. What you’ll find less of is real talk about the inevitability of investment mishaps.

If you are buying financial assets, you will be wrong here and there. You could choose the wrong stock or the wrong fund. You might invest too much. You might get too excited about equities and forget to balance your risk with fixed income securities.

You can learn how to work around some of these errors, but not all of them. To back up this claim, I will enlist the help of famed investor Warren Buffett, also known as the Oracle of Omaha. In his 2021 letter to Berkshire Hathaway ( BRK.A 1.35% ) ( BRK.B 1.21% ) shareholders, Buffett said, “I make a lot of mistakes.”

Buffett’s admission came as he outlined the range of performance trends among Berkshire Hathaway assets. Some of the businesses in the conglomerate are doing very well, some are performing acceptably, and some are “marginal”.

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If Buffett makes investing mistakes, then all investors do. We cannot avoid them. What we can do is manage the impact of these mistakes, financially and emotionally. Here are four strategies that will help you.

1. Diversify asset classes

Investments are grouped into asset classes, or categories that have similar behavior and risk/return characteristics. Stocks are an asset class. Bonds, cash and real estate are also asset classes.

Stocks have high growth potential but also high volatility. Bonds provide stable income but do not appreciate like stocks.

When you hold stocks and bonds together, you have elements of growth and stability. To some extent, you can tailor the behavior of your portfolio by holding more or less of each asset class. If growth is more important to you, you own a high percentage of stocks. If you prefer lower growth in favor of stability, you hold more bonds.

Diversification into real estate, cryptocurrency, and other alternative assets can provide growth less dependent on market cycles.

2. Diversify within asset classes

To diversify within an asset class, you own multiple stocks, multiple bonds, or multiple cryptocurrencies, for example.

For stocks, the rule of thumb is to own 20-25 different companies, spread across several economic sectors such as technology, utilities or finance. You can achieve this by selecting stocks or by investing in one or more diversified funds.

3. Commit to investing for the long term

Diversification minimizes the effects of choosing the wrong security. Likewise, committing to a long-term investing habit protects you from another common investor mistake: mistiming the market.

Having a long-term view is advantageous because the stock market is more predictable over longer periods of time. Stocks can be volatile from year to year, but they generally tend to rise over 10 years or more. In 20 years, the US stock market has always had a bullish trend.

In other words, the easiest path to making money as an investor is to choose quality companies and stay invested in them for decades. After 10 years or more, any untimely purchases will often be moot. After 20 years, you are much more likely to have unrealized gains in your portfolio than unrealized losses.

4. Let it go

If you make a mistake in timing or stock picking, find a way not to get it wrong. Do not count points and do not try to recover losses quickly. You can debrief on what happened to identify lessons or process improvements that can help you. Beyond that, simmering a mistake is not productive.

make money another day

Buffett and other famous investors make mistakes, and so do you. Anticipate slippages by diversifying and staying focused on long-term results. And, when you run into a problem, take the hit and move on. There will be more money to be won another day.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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