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Be Humble and Learn From Your Mistakes Like Warren Buffett

Extreme wealth often causes individuals to lose perspective and acquire a false sense of invincibility. Not so with Warren Buffett (Trades, Portfolio). Together with his Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) partner Charlie Munger (Trades, Portfolio), he has maintained remarkable humility. A key component of being humble is being able to admit when you have been wrong. In his 1991 letter to shareholders, Buffett talked about some of his own errors.

Sins of omission and of commission

Buffett believes that performing autopsies on your mistakes is a good way to improve:

"Post-mortems prove useful for hospitals and football teams; why not for businesses and investors?"

He makes a distinction between two different types of mistake: those of omission and of commission - that is, instances where Berkshire could have acted, but didn't, and those where it did act, but shouldn't have. The former are less visible, but can sometimes be as consequential as the latter. Crucially, Buffett does not regard missing out on companies like Amazon (NASDAQ:AMZN) or Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) as a mistake, as those lie outside his circle of competence:

"In this mea culpa, I am not talking about missing out on some company that depends upon an esoteric invention (such as Xerox), high-technology (Apple), or even brilliant merchandising (Wal-Mart). We will never develop the competence to spot such businesses early. Instead I refer to business situations that Charlie and I can understand and that seem clearly attractive - but in which we nevertheless end up sucking our thumbs rather than buying."

The mistake Buffett talks about is his failure to buy more shares of the Federal National Mortgage Association - also known as Fannie Mae. In 1988, Berkshire bought 30 million shares of Fannie Mae, a $350 million to $400 million trade:

"We had owned the stock some years earlier and understood the company's business. Furthermore, it was clear to us that David Maxwell, Fannie Mae's CEO, had dealt superbly with some problems that he had inherited and had established the company as a financial powerhouse - with the best yet to come. After we bought about 7 million shares, the price began to climb. In frustration, I stopped buying (a mistake that, thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program). In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned."

As a side note, one wonders what Buffett would have thought of Fannie as an investment in the mid-2000s, with all the madness that was going on in the U.S. housing market during that time. Regardless, Fannie was a somewhat different beast in the early 1990s. How much did Buffett's reticence end up costing Berkshire?

"I wish I could give you a halfway rational explanation for my amateurish behavior vis-a-vis Fannie Mae. But there isn't one. What I can give you is an estimate as of year-end 1991 of the approximate gain that Berkshire didn't make because of your Chairman's mistake: about $1.4 billion."

Disclosure: The author owns no stocks mentioned.

Read more here:

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  • Seth Klarman: What Happens When Everyone Suffers From Short-Termism
  • Seth Klarman: What Warren Buffett Did During the 1973-1975 Bear Market

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This article first appeared on GuruFocus.