I always find the Berkshire Hathaway annual general meeting to be deeply educational. No matter what topics the questions cover, I always find fresh insights and tidbits of knowledge on the subject of investing.
One of the recurring themes of these AGMs is the “confessions” of Warren Buffett and his longtime business partner Charlie Munger – when the two discuss their investment mistakes and errors. To his great credit, Mr. Buffett has always been very candid about his stumbles and missteps, even though he’s commonly considered the greatest investor who ever lived.
This year, Mr. Buffett spoke about how sorry he was that he deployed capital too early in the recovery after the stock market meltdown of 2008. Even though he still managed to make several billion through extremely profitable preferred share financings (to Goldman Sachs, General Electric and others), he admitted that waiting awhile and then investing all of Berkshire’s considerable cash hoard in common stocks would have been a much better move. “We didn’t do remotely as well as if we’d kept all the powder dry until the bottom in March, 2009,” he admitted.
Mr. Buffett’s confession got me to thinking about regret, and how powerful (and dangerous) an emotion it is. Over the past year or so, I’ve spoken to many investors who share his feelings. Like Mr. Buffett, they’re kicking themselves for missing out on strong stock market gains. After being burned in 2008, they were reluctant to get back into equities, particularly U.S. stocks. It all added up to a decision to sit on the sidelines and wait for things to get better – a decision that some have come to regret.
That feeling of regret is leading some of these investors to make risky, unwise decisions. Psychologists call this behaviour the “break-even effect.” It suggests that appetite for risk actually increases when a person has a chance to make up for a prior loss. Why? I’m no psychologist, but from what I’ve seen, the feeling of having “missed out” hits us deep in our psyche. It challenges our perception of ourselves. It leads us to question our abilities, and our investment savvy. We second-guess our principles, our convictions and our knowledge. As a result, we crave a second chance.
I think this is the most significant danger of regret – the desire to rush in and “correct” our mistake all at once. This tendency can lead to incredibly rash, short-sighted investment decisions we wouldn’t normally make. Obviously, rushing into any investment is rarely a viable strategy for success. And trying to overcompensate for errors by taking on more and more risk can lead to utter disaster.
But here’s another lesson I gleaned from the recent Berkshire AGM – and the more I think about it, this is one of the most important lessons Mr. Buffett has ever taught. Right after he confessed that he and Mr. Munger should have “kept all the powder dry,” Mr. Buffett made an equally candid, equally powerful confession: “But we haven’t figured out a way to do that, and we’re not going to figure out a way to do that.”
And there you have what may be the universal truth of the investment world: There is no possible way an investor can capture every opportunity. Even the best investor in the world admits he can’t get it right all of the time.
If you’re going to invest, you need to learn how to let it go. You need to be comfortable with the one that got away – because believe me, there will be more than a few of them that do. You need to be able to put aside regret, both financially and psychologically, and focus instead on the next opportunity. It’s what Mr. Buffett does. And we all could do a lot worse than follow his lead.
Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd. and managing director for TIGER 21 Canada. He is the author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)’. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates.