If you haven't already, there is a good chance you'll make a bad investment at some point. Even the most well-considered stakes can come undone due to unforeseen circumstances. Rather than see this as a sign of a poor investor, the legendary purveyor of value investing — Warren Buffett — considers this to be part and parcel of the process.
The impartment of profound, yet simple, investing insights aligns with the publishing of an annual letter to shareholders from the Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) chair.
In true Buffett fashion, the Oracle from Omaha instilled more pertinent lessons in as little as nine pages than what can be found in entire books. Not the least of which is the ability of long-term investors to achieve incredible success in spite of several bad investment decisions.
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Time can balance a portfolio
Maybe it's preventing you from getting started, getting back on the horse, or making your next move. The potential for a money-losing investment can be paralysing. But the truth is, even the best investors are left with egg on their faces from time to time.
In his 2022 annual shareholder letter, Buffett quipped he's no stranger to an investment gone haywire over his 58 years at the helm of Berkshire. In fact, despite being worth more than $100 billion, Buffett describes his capital-allocation decisions during his time as "no better than so-so".
Indeed, the vehement success of Berkshire Hathaway has little to do with achieving a high 'hit rate' of good investments, according to Warren Buffett. Instead, the vast wealth creation has been a product of a handful of 'truly good decisions' — averaging out to roughly one every five years.
The other secret ingredient is: wait for it… time.
What Buffett explained in his letter is that time can be forgiving. This is because of the self-balancing that takes place in a portfolio over a long period of time. The exceptional companies grow to become a large portion, while the 'mistakes' dwindle into irrelevance.
This was well summarised with the 92-year-old's lesson for investors, "The weeds wither away in significance as the flowers bloom."
What Warren Buffett doesn't advise
Now, it's clear that bad investments are to be expected — and the market has a built-in mechanism for correcting those errors over time. However, that doesn't mean in investing you're bound to make money regardless of the decisions made.
The mistake that can not be fixed is a lesson that is never learned.
Even 100 years of compounding in a fantastic investment won't overpower the bad decisions if they are repeated. Think of it like repeatedly watering the weeds… they will eventually overshadow the most brilliant of flowers when praised for their invasiveness.
An important tenet of investing is to always be learning and not repeat mistakes of the past. Be quick to cut the nourishment flowing to the weeds, to borrow Warren Buffett's metaphor.
