Warren Buffett is well-known as a master investor. He also attracts a lot of attention for his share picking insights, which I think can help many investors improve their success rate.
What’s notable is that while investing fads come and go, the comments Buffett casually offered up decades ago are as relevant in today’s market as they ever were. I can benefit from them free of charge. Here’s an example of what I mean.
Warren Buffett on decision-making
I was recently watching a video of an old Berkshire Hathaway shareholder meeting. Buffett was asked a question about how he decides whether to trust business associates. In answering, he made this observation about deciding not to do deals that came his way: “We rule-out 90% of the times and we may be wrong about a fair number we’re ruling out. The important thing is whether the ones we’re ruling in we’re right about.”
What’s he saying here? First, I notice that Buffett acknowledges that he may be mistaken about a lot of deals he turns down. Elsewhere he refers to these as “errors of omission” – good deals not done. He contrasts these to “errors of commission” – bad deals done. That’s a humble admission for such a successful investor. But the second interesting point here is that Buffett basically couldn’t care less about missing out on those great deals. Instead, his focus is on how good his judgement is on the deals he decides to do.
A bird in the hand
I see Buffett’s approach as an application of the old adage “A bird in the hand is worth two in the bush”. In other words, something good that I possess is better to me than something (perhaps) even better that isn’t mine. As an investor, there’s more to it than that. This approach goes to the heart of Warren Buffett’s view on capital preservation. As he says, “Rule number 1: Never lose money. Rule number 2: Don’t forget rule number 1.”
Why does that matter so much to Buffett? The answer sounds obvious – and it is. He invests to make money, pure and simple. If he loses money, his investments are unsuccessful. If he loses enough money, he won’t have any capital left to invest at all. So Buffett values capital preservation over any fear of missing out on possible returns. Where an investment doesn’t meet his criteria, for example because there’s an insufficient margin of safety, he’d rather walk away from it than bend his investment criteria. That takes a lot of restraint as an investor. But it also help explains why Buffett is one of the most successful investors in history.
How I’m using this Warren Buffett wisdom
This Warren Buffett thinking has direct implications for me as an investor, I feel. While it’s tempting to focus on high possible returns and lament not taking the chance to get into companies when they were cheap, I won’t bother.
Instead of spending time on shares I didn’t buy, I try to focus on making sure that the ones I actually do buy meet my investment criteria. Hopefully over time that will help boost my investment performance.
