Over the years, Warren Buffett has said many great things about his investing principles.
But the legendary investor’s best quote might be about one of his biggest blunders…
I’m talking about his early 1990s investment in USAir.
In his 1994 letter to Berkshire Hathaway (BRK) shareholders, Buffett simply attributed the blunder to “a case of sloppy analysis.” And he gave two possible explanations…
First, Buffett noted the senior nature of the security he purchased. That could’ve made him overconfident in the ability of the investment to maintain its value in challenging times.
The other possible case of sloppiness was – and this is Buffett’s word – “hubris.” And in the letter to shareholders, he went on to admit… “Whatever the reason, the mistake was large.”
If the “Oracle of Omaha” can own up to his miscues… I can, too. And so can each of you.
As part of an end-of-year ritual, I channel Buffett’s USAir blunder. In other words, I reflect on what I’ve done wrong in the past. It helps me know what mistakes to avoid in the future.
And that means I never forget Air Florida…
Air Florida was a deep-discount airline in the 1970s.
Shortly after the industry was deregulated in 1978, CEO Eli Timoner explained to analysts that an airline seat was a commodity. He boasted that the carrier with the lowest-cost structure – the one that could afford to charge the least – would come out on top.
I believed Timoner… And I wrote a report headlined, “Nothing Can Stop Air Florida.”
But as it turned out, something did stop Air Florida – and quickly.
In short, Timoner was wrong… Customers instead showed that safety and quality of service mattered. And I wound up looking like a fool when Air Florida went bankrupt in 1984.
However, as I’ve said, it helped me to learn from my mistakes. With that in mind, I want to share three lessons for the new year to help us avoid common investing pitfalls…
1. Trust grudgingly.
Hear positive statements from company officials and others connected to your investment as if you were a litigator preparing to cross-examine a hostile witness.
This one is especially challenging. Take my experience with appliance maker Sunbeam as an example…
For a while, it looked like cost-cutting boasts made by “Chainsaw” Al Dunlap after he became CEO of Sunbeam in the late 1990s were real. The cooperate turnaround specialist looked like he could work magic at the struggling company… And I was all in.
But as soon as hints of accounting problems surfaced, I jumped ship. I didn’t follow the company all the way down the drain…
As a result, I was fortunate to watch from the grandstands as the U.S. Securities and Exchange Commission sued Dunlap and other Sunbeam executives. And eventually, in 2001, the company filed for bankruptcy.
2. If you see signs of smoke, don’t wait around to see the fire.
By that, I’m talking about not waiting after the first hints of trouble to find out if everything will come crashing down. That’s especially true if finding the answer is outside my skill set.
Yes, some traders and speculators can do well if it turns out the fuss was unjustified. That’s fine… I wish them well.
But there’s plenty of other fish in the sea… As of this writing, our Chaikin Analytics database includes 4,798 stocks with “Power Gauge” ratings. So instead of mourning a missed winner, I’ll just hunt among the remaining 4,797 stocks for another one.
3. Don’t let a bad outcome shake you off of a sound process.
It’s important to know how to separate your process from the outcome.
Everyone has experienced an investment going wrong – like what happened to me with Air Florida. That’s just part of investing. And it’s true even when you use a great strategy.
The key is to stay patient, though. Don’t flail…
The risk here is believing that every event related to your investment reveals the “real” truth to you. But you must know how to tune out the “noise” and stick to your process…
Endlessly tinkering with your process is a sure sign that you’re not willing to admit some trades just don’t go as planned. Sometimes, it’s OK to walk away and accept losses.
So as we prepare to turn the page on 2021, take some time to reflect on what you’ve done wrong. If a great investor like Buffett can own up to his miscues, so can all of us.
Good investing,
Marc Gerstein
