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Don't Blow It Like Buffett: Investing VIPs Share Their Biggest Mistakes

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What You Need to Know

  • One theme: Heavy stock or sector concentrations.
  • Misuse of margin is another mistake.
  • One strategist admits her portfolio is more complex than necessary.

Even the savviest investor can make a costly error that stirs regret and, possibly, provides a useful lesson.

Billionaire investor Warren Buffett himself has shared investing mistakes, including his admission to shareholders in 2017 that he had been too dumb to see the opportunity in Amazon. 

Buffett acknowledged his decision to avoid investing in the e-commerce giant early on had cost shareholders in his Berkshire Hathaway a lot of money. While such a missed opportunity can certainly prove to be a miscalculation, so can the opportunity taken that would have been better avoided.

ThinkAdvisor recently asked high-profile investors and strategists to share their worst personal investing mistakes. A few responded with lessons they learned and steps they took to fix portfolio trouble spots.

Going All In on One Stock

Larry Swedroe, head of financial and economic research at Buckingham Strategic Wealth, said that in the mid-1980s, while working in investment banking and trading individual stocks in his own portfolio, he had the idea there would be consolidation in the U.S. banking industry, with big banks buying up smaller ones.

There was also talk at the time that the U.S. and Canada would sign the North American Free Trade Agreement (NAFTA), he noted.

Swedroe spotted a small bank in upstate New York near the Canadian border that was trading at a very low price to book value. Its earnings were growing consistently and friends gave it good reviews. Swedroe started to buy its shares, eventually reaching a $100,000 position, which was about 10% of his net worth.

“As it turned out everything that I thought would happen happened,” Swedroe said, adding that someone who had invested in a regional bank index would have done spectacularly well.

The idiosyncratic risk of a single investment, however, “came to bite me,” when a key executive committed fraud and the bank went under, he said.

“I lost most of my investment,” selling before the stock went to zero, Swedroe said. And because he had held the securities in his IRA, he couldn’t deduct the loss on his taxes.

“It shows you that even if you could predict the future, which I did very well on the major themes, that something unexpected and that’s idiosyncratic to an individual company can come back to bite you,” he said. “And so I learned a good lesson from that, that you shouldn’t take idiosyncratic risk.”

That means avoiding owning individual stocks altogether unless they’re in an account held for entertainment purposes, he added. The odds of a single stock outperforming the market are so low that investors shouldn’t try, Swedroe added, noting most stocks underperform the market.

One high-performing stock, like Google, makes up for many losers, he said, noting only 4% of stocks account for 100% of excess returns over Treasury bills.

Buying Into a Bubble

“When I first started trading it was the late 1990s and it was a crazy time to learn how things worked,” Carson Group Chief Market Strategist Ryan Detrick said via email. “I was simply buying all the networking names that were all the rage and I was on a ton of margin. I quickly more than doubled my money and then the bubble burst.”

“I learned that stock indeed can go lower and that margin can work both ways. Within a period of months I had lost virtually everything. It was a great lesson though. Nothing lasts forever, manias happen and it is hard to realize you are in one when it is happening, and leverage is a very dangerous thing if not done correctly.”

Too Much Employer Stock

Christine Benz, Morningstar’s director of personal finance and retirement planning, recently wrote about her five “failings” as an investor: holding too much employer stock, holding too much cash, not holding enough in bonds, being slow to make IRA contributions and not always placing investments in the most tax-advantageous accounts.

She told ThinkAdvisor in an email that she’d call out the heavy investment in employer stock.

“I already have a lot riding on my employer via my paycheck, so it doesn’t make sense to stake a chunk of our portfolio in it, too,” Benz said. “I have been working to divest of it but it is still a larger position than it ought to be.”

In her column, she said she and her husband hold more than the roughly 5% often considered a reasonable upper limit for employer stock.

Smaller Missteps

One of Benz’s colleagues, Morningstar Research Services portfolio strategist Amy Arnott, also wrote recently about her investing mistakes, listing eight missteps. 

Some mistakes, like those Arnott cited, are less about investing in the wrong stock, or missing an opportunity to invest in a hot one, than about taking steps to maximize personal finances. The mistakes aren’t catastrophic, she wrote.

Arnott cited, for instance, being late to contributing to a health savings account, avoiding signing up for long-term care insurance, never establishing a Roth IRA, and deciding to pay off the mortgage early, among other issues. 

She also described her portfolio as more complex than necessary, saying a few passively managed mutual funds and ETFs would probably comprise an ideal portfolio.

Image of Warren Buffett. Credit: Nati Harnik/AP


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