Over the next 6 days I will be posting excerpts from an article written by two well know investment professors. Burton G. Malkiel who is an economics professor at Princeton and author of “A Random Walk Down Wall Street,” The other is Charles D. Ellis who was a professor at Yale and has authored many books on the subject of investing. The question we must ask ourselves with regard to investing is “What is it that makes a successful investor so successful?” Let’s look at a person that is considered one of the most brilliant investors in our time, Warren Buffett. “Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios.” Here are two examples:
“In early 2000, Berkshire Hathaway’s portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand – and he didn’t claim to understand the complicated, fast-changing technology business – or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was an old fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.
In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them “financial weapons of mass destruction.” When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.”
What can we learn from him and his success, or better stated what doesn’t he do?
Day #1 – Overconfidence
Day #2 – Following the Herd
Day #3 – Timing the Market
Day #4 – Assuming More Control Than You Have
Day #5 – Paying Too Much in Fees
Day #6 – Trusting Stockbrokers
Feel free to leave comments!