[Buffett's Historical Defeat] Psychological reasons for losing 660 billion
Hello, this is Koyama.
If you were handed 1,000,000 yen in cash,
“Within a year, please make money through investments.”
and were given that mission, what would you start with?
“If you don’t have a position, nothing will start.”
So I think many people end up
taking on a position in a hurry.
Moreover, they might invest the entire 1,000,000 yen and go all in...
If you are that type of person, there is one quote I’d like to share.
Here it is.
↓
“If I were given eight hours to cut a tree down,
I would spend the first six sharpening my axe.”
This is a saying by the 16th President of the United States, Abraham Lincoln.
Sharpening the axe, that preparation is
more important than anything.
If you follow this saying, when investing as well,
during the first year you should not move any cash,
and instead think through your strategy
and acquire the proper methods
as preparation.
Nine months might be a bit long,
but at the very least, for three months or six months
you should practice with demo trading without investing cash
as training.
The approach of “just take a position no matter what”
is out of the question.
Indeed, you won’t know until you actually move cash and trade,
there are many things you won’t understand.
Practice and the real thing are different.
However, trading without any strategy
and rushing to move cash
is the most foolish thing to do.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
There is a path in investing that you must absolutely avoid.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
So, as preparation before starting investing,
how should you learn?
Learning from people who are actually winning is, of course, effective,
but learning from others’ failures
is also effective.
Doing the right thing is of course important, but investing has
“paths you must never take.”
there are, and whether you can avoid those paths
can determine your success or failure.
And that path you should avoid is learning from “other people’s failures.”
However, unfortunately, stories of failure
do not spread as widely as success stories.
As with most people, you don’t want to share your own “failure stories.”
So, you also would prefer to hide things like “I actually lost this much.”
Therefore, you don’t hear much about failures.
That said, there are rare investors who
honestly admit their mistakes and reveal them openly without concealing them.
Warren Buffett, the world’s No.1 investor, is one of them.
Even Buffett is not万能.
Even Mr. Buffett is not perfect, and sometimes makes big mistakes.
There have even been substantial losses.
However, Buffett did not hide them,
handled them properly, and established his current position.
So, what exactly did Buffett do wrong?
In this, we will introduce
the biggest mistake Buffett made.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
The psychological reason Buffett made the mistake
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
In 1993, Berkshire Hathaway, led by Buffett,
acquired the American shoe manufacturer
Dexter Shoe Company
for $433 million
.
However, Dexter’s value eventually became zero.
Zero.
Moreover, when Dexter was acquired,
Berkshire Hathaway used
Dexter’s $433 million worth of its own shares.
Those $433 million worth of Berkshire shares
are worth about $60 billion at current price.
In Japanese Yen terms, about 660 billion yen.
In other words,
Buffett effectively lost 660 billion yen.
Then, why would a person like Buffett
make such a massive mistake?
First, a psychological perspective we will examine.
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
Psychologists Dale Griffin and
Amos Tversky
said that“when the available evidence partially supports a hypothesis,
intuitive judgments are overly influenced by it.”
Buffett’s facts at hand were
Dexter’s financial data, the proposed acquisition price,
and the successful experience with the HH Brown acquisition,
and that’s all.
Moreover, not even two years had passed since that success.
Buffett fell into a common human behavioral trap,
and, when deciding on the Dexter acquisition,
he clung to the most vivid success—
“recently, HH Brown’s acquisition went well.”
Michael Badkowski
‘Big Mistake (Nikkei BP Marketing)’
2019 Sep 24, First Edition, First Printing
P.133
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
In short,
he clung to past success.
The easy belief that “it worked before, it will work now”
led to failure.
Even Buffett, who has seen countless battles,
can make such mistakes.
I hope you will use Buffett’s missteps
as nourishment for your own learning.
When you invest, there are occasions when
you can obtain substantial profits unexpectedly.
Sometimes large sums of money come to you easily,
However, many people turn a lucky windfall into the start of misfortune.
In December, the Nikkei stock average reached a year-to-date high.
At this moment, some people must have greatly increased their profits.
However, if you have earned a large profit,
these are precisely the moments to be careful.
For example, in 2020 the stock prices dropped rapidly
and you could lose all the gains by year-end,
so please be cautious.
Thank you for watching until the end today as well.
Kozan Keizo
