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!