Warren Buffett on Investing Mistakes

You can find loads of information online about avoiding investing mistakes. What you'll find less of is real talk about the inevitability of investing mishaps.

If you're buying financial assets, you will mess up here and there. You might pick the wrong stock or fund. You might invest too much. You might get too enthusiastic about stocks and forget to balance your risk with fixed income.

You can learn your way around some of these mistakes, but not all of them. To support that statement, I'll enlist the help of famed investor Warren Buffett, also known as the Oracle of Omaha. In his 2021 letter to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders, Buffett said, “I make many mistakes.”

Buffett's admission came as he described the range of performance trends among Berkshire Hathaway's assets. Some of the conglomerate's businesses do very well, others perform acceptably, and still others are “marginal.”

Image source: Getty Images.

If Buffett's making investing mistakes, then all investors are. We can't avoid them. What we can do is manage the impact of those mistakes, financially and emotionally. Here are four strategies that will help.

1. Diversify across asset classes

Investments are grouped into asset classes, or categories that have similar behaviors and risk/reward 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 produce stable income but don't appreciate the way stocks do.

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'd hold a high percentage of stocks. If you'd prefer lower growth in favor of stability, you'd hold more bonds.

Diversifying into real estate, cryptocurrency, and other alternative assets can provide growth that's less dependent on stock market cycles.

2. Diversify within asset classes

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

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

3. Commit to investing 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 focus 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 trend up over 10 years or more. Over 20 years, the U.S. stock market has always trended up.

In other words, the easiest path to making money as an investor is to pick quality companies and stay invested in them for decades. After 10 years or more, any mistimed buys will often be irrelevant. After 20 years, you're far more likely to have unrealized gains in your portfolio vs. unrealized losses.

4. Let it go

If you do make a mistake on timing or security selection, find a way to let it go. Don't keep score and don't try to earn back any losses quickly. You might debrief yourself on what happened to identify any lessons or process improvements that can help you. Beyond that, stewing over a mistake isn't productive.

Make money another day

Buffett and other famous investors make mistakes, and you will, too. Plan for the slip-ups by diversifying and staying focused on long-term results. And, when you do hit a snag, absorb the blow and move on. There'll be more money to make another day.

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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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