January 18, 2022

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Business Life

How to Make Mistakes Well

Earlier this month, we learned that Warren Buffett (Trades, Portfolio) had started to sell off some of his airline holdings.

At this point, we do not know why the Oracle of Omaha decided to make this decision. However, regardless of whether or not he still thinks of these companies as an attractive investment, he seems to have deemed it prudent to sell at least part of his holdings in these stocks.

The ability to realize when to cut his losses and move on is one of the Oracle of Omaha’s most exceptional and possibly most underappreciated qualities.

How to make mistakes well

Buffett, like every investor, has made many mistakes throughout his investment career. However, unlike many other investors, he’s always been prepared to admit when he has made a mistake, then sell and move on.

By avoiding holding on to hopeless positions, Buffett has reduced losses and improved profits over the long-term.

It is highly likely that when the global economy is allowed to resume operating again, some industries will emerge in a completely different shape. Many companies won’t make it through. Some will have to adapt to the new normal, and others will prosper. What’s more, highly leveraged businesses are unlikely to survive for long with zero revenue (at least, not unless the government pulls some serious economic policy changes, which may not necessarily be a good thing).

This implies that now, more than ever, it is essential to realize when you have made a mistake, sell up and move on. Buffett’s advice for coping with these losses is to focus on the long term, and don’t look back. Indeed, he once said:

“You’re going to make mistakes in life; there’s no question about it…

You don’t want to make them on the big decisions, who you marry and things like that. So there’s no way I’m going to make a lot of business and investment decisions without making some mistakes. I may try to minimize them. I don’t dwell on them at all. I don’t look back….

The triumphs in life are partly triumphs because you know that everything isn’t going to be a triumph.”

Adopting this mentality might seem hard at the time, but it is vital for success over the long term. Dwelling on past mistakes and trying to take revenge on the market by averaging down into losing positions can be a terminal decision. You can recover from a loss of 90% of your capital. You can’t recover from a loss of 100%.

Learning from mistakes

Looking at and learning from the mistakes of others is a great way to improve your investing strategy without having to go through the emotional pain of taking losses yourself.

Some of Buffett’s greatest mistakes involves buying companies that had no competitive advantage. These include examples such as the textile business of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) and Waumbec Textile Company, another New England textile company. Both of these companies looked cheap at the time, but they had no competitive advantage and were soon overtaken by more efficient competitors.

Other examples include Dexter Shoe Co. This was another business that was sidelined by cheaper competitors. British Retail giant Tesco also had a slim competitive advantage. It was, and remains, the largest retailer in the country. Groceries are a commodity product, and competitors were able to snatch market share by slashing prices quickly.

In each of these examples, Buffett lost money. The most significant loss was buying Berkshire. Buffett has put the cost of this mistake at over $200 billion, but these losses haven’t held Buffett back. Every time he’s come out stronger. That’s possibly one of the most important lessons we can learn from the Oracle of Omaha.

As investors, we will suffer setbacks. However, as long as we learn from these mistakes and don’t chase losses, there’s a good chance we will recover in the long run.

Disclosure: The author owns shares in Berkshire Hathaway.

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This article first appeared on GuruFocus.

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