Warren Buffett is practically a living legend. The investment community eagerly awaits his annual shareholder letter.
His investment strategy and philosophy are a practical guide for anyone because his focus lies on economically sustainable and long-term results.
But like every other investor, he has made mistakes, and at best, we can learn from his mistakes so that we have as successful a year as possible in terms of investing strategies.
Buffett isn’t perfect, so we can’t expect all that he says to ring true in 2021, especially considering how he has predicted a market crash this year.
A market crash means it’s time to readjust some investment strategies so that we can come out on the winning side, especially with how delicate the economy is in 2021.
Buffett’s investment philosophy
Warren Buffett is perhaps the most famous proponent of value investing. His investment philosophy is deceptively simple.
He often buys able-managed businesses “that possess favorable and durable economic characteristics.”
Buffett spots undervalued companies buys them, and turns in the profit. It’s a risky move, and it has cost him before.
As simple as Buffett’s strategy sounds, enforcing it to turn in a profit is pretty tricky, even with his experience.
There is a lot of research and assessment that long before Buffett decides to buy in a company’s stock.
He is a great investor because of his experience with business models and his uncanny ability to spot trends.
However, Buffett’s investments do not always lead to success. Learn how to avoid this from happening by reading on:
#1: Holding on to assets for too long can backfire
Buffett has a history of holding on to his investments for too long. In 2012, he owned 415 million shares of Tesco stock.
By 2014, the shares tumbled, and Buffett was able to make an initial sale on the stock he carried and earned a $43 million profit, but he wasn’t able to move fast enough for the rest of the stock.
In a 2014 letter to shareholders, Buffet wrote: “An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.”
The company lost $444 million because of this mistake.
#2: Buying at the wrong price can cost you
When Warren Buffett bought a large stack in ConocoPhillips’ stock, he did so because he expected It to play on future energy prices.
Since he predicted oil prices would rise, he figured that ConocoPhillips would be an excellent way to benefit from this price hike.
Unfortunately, it did not turn out to be a good investment because the price he paid was too high. This resulted in a multibillion-dollar loss to Berkshire Hathaway.
Cure oil prices when he bought stocks were more than $100 per barrel, so the oil company stocks were reasonably high.
The mark of a good investment is for it to pay off in the future. Buffett got swept up in the excitement he should not have bought stocks for that high a price.
Research what you’re investing in instead of being swept up by its potential for growth. Buffett was unable to see how crude oil price has always been volatile, and boom and bust cycles are frequent in oil companies.
“When investing,” Buffett said, “pessimism is your friend, euphoria the enemy.”
#3: A successful business does not equal revenue growth
In 1989, Buffett bought preferred stock in U.S. Air. He was attracted by the revenue growth the company had achieved at that point.
But this investment backfired on Buffett because, despite its success, it could not achieve enough revenues to pay the dividends due on his stock.
Fortunately, Buffett was able to unload his shares and turn a profit, but his misplaced optimism and emotions once again drove him.
Successful businesses do not necessarily bring in enough revenue to pay off their investors. Be wary of all the potential companies that flourished during the pandemic.
They may be successful but consider as well their growth and profits. Buffett admitted in 2007 that significant capital investments are often required to enable the growth of a company’s revenue.
Airlines often require capital-intensive business models because they still have to pay off debt even though they rake in a large base of earnings.
This leaves very little revenue for shareholders and puts the company at risk of bankruptcy.
#4: Undervalued companies often have no competitive advantage
Warren Buffett purchased Dexter Shoe Co. for $433 million in 1993. He explains that this was a poor decision because he thought the company had a “durable competitive advantage.”
Unfortunately, that advantage vanished within years. His investors lost $3.5 billion, which was about 1.6% of Berkshire Hathaway’s net worth.
He claims that this is one of the worst deals he has ever made, but he did learn that a company is at its best if it has a viable competitive advantage.
This means that if customers find no use for a product, then the company producing it is probably destined for failure.
Most undervalued companies are undervalued for a reason. The business is either close to going bankrupt or has already sunk.
Buffett’s tactic or strategy to buying undervalued companies has cost him a lot of money before. This is not a wise move for 2021.
Particularly because businesses are still recovering from 2020, and the market cannot be assured of all companies’ success when priorities have shifted.
Conclusion
Like everyone else, Warren Buffett has made many mistakes and knows that he will make many more in the future.
While it is humbling that he admits to what he has done wrong and has learned from it, is it possible that there are some investing strategies that he could do away with to lead him towards success?
Warren Buffett’s strategies seem to have made him the successful investor he is today, but the same cannot be said for those just starting in the trading game.
The Warren Buffett way may not be your way. Consider Buffett as an inspiration, learn from his mistakes, and develop your plan for your success.
