Super-investor Warren Buffett has a lot to teach us, much of which he offers freely to all in his annual letters to shareholders. He was offering compelling lessons back in the 1960s, when he was running a smaller, simpler partnership. One in particular can help us become better investors: the importance of self-restraint.
In his January 1967 letter to partners, for example, he explains that his investors shouldn't expect him to perform as well in the coming decade as he did in the previous one, because he's older (36 at the time) and has much more money to invest. As a portfolio grows, it can be harder to find enough good investments for it.
A glance at massive mutual funds reflects this, too. The Fidelity Contrafund (FCNTX), for example, has its $58 billion spread across nearly 500 different holdings. Which means that, except for a few big positions, it has far less than 1% of its assets invested in each stock it owns.
Buffett's size problem has only grown bigger. (Fortunately, many of the great stocks he can't invest in, we can.)
The sphere of understanding
Even more interesting was what Buffett said about his "sphere of understanding," which we today often refer to as his "circle of competence." During the Internet bubble years, he was routinely scoffed at for steering clear of soaring technology companies … until the bottom fell out of the market, leaving him vindicated. Dell shares, for example, more than tripled in three consecutive years from 1996 to 1998. Yet they lost two-thirds of their value in 2000, and after a decade of ups and downs, they're right back where they were at the end of 2000.
The 1967 letter shows that Buffett was careful 43 years ago in the same way that he is today. As he explained: "We will not go into businesses where technology which is way over my head is crucial to the investment decision. I know about as much about semi-conductors or integrated circuits as I do of the mating habits of the chrzaszcz." It takes a lot of strength to stick to your convictions when stocks around you are tripling year after year -- for many decades! Yet Buffett knew what he didn't understand.
We would do well to learn from his example. You may be tempted by EMC's
Similarly, First Solar
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Longtime Fool contributor Selena Maranjian owns shares of First Solar, which is a Motley Fool Rule Breakers selection. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.