Even Warren Buffett makes Mistakes, but he does one thing differently

Amar Pandit , CFA , CFP

A month ago, Warren Buffett sold his entire airline stake at a $ 3.5 billion loss. He said that the airline business will never be the same again. However, in the last 4 weeks airline stocks have rebounded sharply from 45-76% (American Airlines is up 76%, Southwest 45%, Delta 59% and United 62%). Airline stocks have been some of the biggest gainers then.

US Airline passenger volume is showing a clear uptick from 3.6% of last year’s volume in April to 13.6% now. The latest US airline data suggests a slow and steady return to normalcy. Airlines are adding more flights and it is expected that July will be far stronger than everyone had thought earlier. On one hand NASA and Elon Musk’s SpaceX launched astronauts into the International Space Station and on the other hand everyone was worried about the future of airlines. Yes, a lot of things will change for airlines whether their business model, seat configuration, number of passengers, number of flights and many more but air travel is here to stay for a long time. The objective of this column is not to predict where airline stocks are headed or to discuss the future of flights.

This is not the first mistake that Warren Buffett has made. He himself has said “You’re going to make mistakes in life, there’s no question about it”. He further added that there is no way to make good business and investment decisions without making mistakes. Though Buffett has exited certain stocks and is holding higher levels of cash, he is significantly invested now like at all points of time.

This is absolute gold and every investor must realize that the keyway to be successful in investing is by being invested (and learning from your mistakes). You cannot be successful if you are out of the market.

Let me explain this with a simple example since we started with the airline industry.

Imagine you are on a flight from Delhi to San Francisco (Direct Flight) and your flight gets into extreme turbulent weather (I have experienced a few where I thought the flight would crash. Luckily with God’s grace we made it).

What would you do?

a) Jump out of the flight

b) Start screaming at the airline staff pilot that you have paid so much for the ticket and why is the flight experience like this. Why did the flight hit turbulent weather?

c) Sit tight with your seat belt fastened

100% of us would not opt for Option a. Neither would 99.99% of us opt for option b. Finally, 100% of us would opt for Option c.

This is the right thing to do (I am sure you know this) because every flight will face turbulent weather and some flights will face extremely turbulent weather too. The key is to reach your destination and the role of your pilot is to take you safely to your destination.

Likewise, every investor will hit temporary market declines and at least 2-4 severe temporary market declines of 50%+ in his/her investing life. This is called volatility and I call it the Emotional Rollercoaster ride. Imagine a rollercoaster ride and the feeling that builds up when you reach the top and the emotions as you come down. That is the Emotional Rollercoaster investors go through in extreme times like 2001, 2008 and now.

What would you do now?

a. Get out of the market and wait for things to return to normal (which is often always late) or never invest.

b. Start screaming at your Advisor (Pilot) or their team for not IDENTIFYING the Turbulent Weather.

c. Sit Tight. If you have a great financial pilot, he will ensure that you reach your destination. If you are self – flying (assuming you know how to fly), then you should sit tight too. If you do not know how to fly, then Pray to God that your flight lands.

Once it lands, find that co-pilot as soon as you can.

I am happy to see many investors who even at age 60+ find the courage to invest during turbulent times. I am not sure whether the reason is that they have seen more rainfalls than others or that they have wise financial pilots.

COVID-19 still has no cure. US and UK trade tensions with China are building up. Civil unrest is breaking out in the US. But the Nasdaq 100 just hit a record high and the S&P 500 is down only 5% from its February peak all because investors are focused on a better financial future. The excess global liquidity is driving our markets higher and higher (even though GDP for the next year is projected at – 5%). Do not ask me why (have given a hint). I will cover this in my future post.

There will be no perfect time to invest. You will not get an invitation for a good time either. This is as good as any other time to figure out your number – the number you need to maintain your lifestyle for the rest of your life and never having to worry about money. Once you figure that out, start saving and investing in a disciplined way.

Pin this somewhere so it’s easy for you to access, Warren Buffett’s quote that I love “It’s good to learn from your mistakes. Its’ better to learn from other people’s mistakes.

The difference between investors without a wise co-pilot and the legendary Warren Buffett is that they neither learn from their mistakes nor from the mistakes of others.

What type of investor will you be?

1. Will you learn from other people’s and your mistakes? OR

2. Will you continue making such mistakes during every sharp decline?

I have used this Brian Tracy’s quote earlier but it’s so good that it’s an apt closing line for this post “If you do what successful people do, nothing can stop you from eventually getting the same results they do. If you do not do what they do, nothing and no one can help you”.