Of all the challenges investors have to deal with, the biggest one is ourselves.
Keeping our mental biases under control and using second-level thinking to make sensible, informed decisions rather than knee-jerk reactions to market movements is critical if we want to be successful investors over the long-term.
There is an excellent argument to be made that Warren Buffett (Trades, Portfolio) has become so successful because he is so good at keeping his mental biases and self-destructive behavior under control.
Buffett and self-destructive behavior
If you read through the handful of biographies on Buffett that have been published so far, it becomes clear that this is no ordinary investor. He is an introvert that spends a considerable amount of time thinking alone and does not allow others to influence his ideas.
That being said, in the past, he has declared that Benjamin Graham and Charlie Munger (Trades, Portfolio) have had a tremendous impact on his is understanding of businesses and the general investment environment.
However, at the core of Buffett's investment strategy is his overriding desire to avoid "self-destructive behavior."
What does this mean exactly? The Oracle of Omaha spoke about the topic at the 2016 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting of shareholders:
"You know, as Yogi Berra said, you can see a lot just by observing. And that's pretty much what Charlie and I have been doing for a long time. And you do — I mentioned pattern recognition earlier — you know, there's — you — and I would say it's important to recognize what you can't do.
So we have — we may have tried the department store business and a few things, but we've — we've generally tried to only swing at things in the strike zone, and our particular strike zone. And it really hasn't been much more complicated than that.
You do not need — you don't need the IQ in the investment business that you need in certain activities in life. But you do have — you do have to have emotional control. I mean, we see very smart people do very stupid things, and it's fascinating how humans do that.
Just take the people that get very rich and then leverage themselves up in some way that they lose everything. I mean, they are risking something that's important to them for something that isn't important to them. Well, you can say, you could figure that one out in first grade, but people do it time after time.
And you see that constantly, self-destructive behavior of one way or another. I think we've probably — and it doesn't take a genius to do it, but I think we've sort of avoided the self-destructive behavior."
Slow down, think about the outcome
Making rash decisions both in life and in investing is the sort of self-destructive behavior Buffett is warning against.
As I noted above, Buffett spends a tremendous amount of time reading and thinking. I believe this is why he has been able to avoid self-destructive behavior so effectively.
He thinks through every decision thoroughly and does not let anyone or anything else drive his actions. This might have cost Buffett and his investors some money due to inaction, but it has undoubtedly benefited them much more in the long run.
Many of us mere mortals can learn from this approach. There are thousands of examples out there of investors who have made serious mistakes and lost significant sums of money due to knee-jerk reactions. By studying these examples, we can improve our chances of avoiding the same mistakes.
The best way to do that is to think carefully about each and every opportunity and make sure you are not engaging in any self-destructive behavior. If this approach is good enough for the Oracle of Omaha, it is good enough for us as well.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- David Einhorn and Brighthouse: Cheap, but the Stock Could Stay That Way
- Buffett: Ignore the Macro, Concentrate on 'What Is Knowable'
- Why Warren Beffett Decided to Enter the Utility Business in 1999
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