What Warren Buffett Can't Teach You

I'll admit it -- I'm just as much of a Warren Buffett fan as the next guy. I own Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) stock, and I've read through Buffett's shareholder letters and annual reports more thoroughly than those of the other companies I follow.

Over the years, I've learned a lot from Buffett. By itself, though, that learning didn't improve my returns. Something was missing, but it took me years to figure out what it was.

Keeping it simple
Perhaps the best thing about Buffett's teachings is that even though they're extremely valuable, they're also easy to understand. Consider:

  • To be a better investor, you have to read more. We're fortunate that companies are required to give us tons of information about what they do, but that data does us no good if we ignore it.
  • Rather than buying decent companies at bargain prices, pay reasonable prices for great companies. This helps put the focus on a company's business model. In the long run,  the success of the business will determine whether your shares increase in value.
  • Never lose money. You won't be 100% accurate with your stock picks, but preserving your capital should always be one of your primary goals in choosing investments.
  • You don't get paid for activity; you just get paid for being right. You don't gain anything from trading frantically. Often, the best thing to do is absolutely nothing.

These simple concepts are refreshing compared to some other investment advice you see. Some technical analysis gurus try to teach people the mathematics of Bollinger bands, or the art of identifying wave motions in stock charts. Even mainstream fundamental stock analysis is too much for many people to fully understand.

Practice makes perfect
But despite the simplicity of Buffett's teachings, I finally realized what that missing thing was: experience. It turns out that putting those teachings into practice isn't quite as simple -- especially when current events make you want to do the exact opposite.

I certainly haven't always succeeded in acting on what I've learned. Here are a few of the costly mistakes I've made by not following what I'd learned:

  • Putting stock price over business prospects. Earlier this year, I sold shares of Freeport McMoRan (NYSE: FCX  ) and ArcelorMittal (NYSE: MT  ) simply because their stock prices had run up very quickly. Yet in doing so, I ignored my belief that they had good long-term business prospects. Since I sold, they've gone up another 22% and 34% respectively.
  • Not jumping on unique opportunities. On my watch list, I have several companies whose stocks have moved wildly in recent months, including Goldman Sachs (NYSE: GS  ) and Chesapeake Energy (NYSE: CHK  ) . In mid-March, during the Bear Stearns crisis, both stocks fell sharply to attractive levels. But I waited for them to fall further. I'm still waiting, while both have risen more than 25% from their March lows.
  • Failing to protect capital. Starbucks (Nasdaq: SBUX  ) is a favorite stock of mine, and I chose to ignore signs of its slowdown. As a result, I've held on while the stock's fallen from $40 to below $17.

I'm not proud of any of these mistakes. But they have helped make my investing education more complete than what I could get from Warren Buffett's words alone.

Turning words into action
Reading about experts and their investing methods will help you improve your own results. But by itself, learning what to do isn't enough -- you also have to go out and do it.

If you're not happy with your investing results -- or you just think you could improve them -- look at the actions you've taken. See whether they match up with what you've learned. When you find mistakes, examine them more closely, and figure out a strategy for avoiding them in the future.

If investing were as easy as reading a book, we'd all be like Warren Buffett. What makes a few investors extraordinary is their ability to turn their knowledge into concrete actions that make money. When you see yourself taking those actions, you'll be well on your way toward becoming an expert investor yourself.

More on learning from the greats:

At the Motley Fool, we try to take the best from every great investor and turn it into results you can see in your portfolio. Try any of our market-beating newsletters free for 30 days and take action toward improving your investing returns today.

Fool contributor Dan Caplinger didn't make it to Omaha this year, but he'll get there someday. He owns shares of Berkshire Hathaway and Starbucks. Starbucks, Chesapeake Energy, and Berkshire are Motley Fool Inside Value picks. Starbucks and Berkshire are Motley Fool Stock Advisor selections. The Fool owns shares of Starbucks and Berkshire. The Fool's disclosure policy teaches you what you need to know.


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