Buffett's Sins of Omission
By Chandler Lutz
October 8, 2007
Warren Buffett once said that his greatest mistakes were “sins of omission.” This is a compelling statement from the man who is known for being thrifty and as well as savy. What does it mean and more importantly how can it help us become better investors?
Before we dive too deeply into these issues, let me give you a little background as to what Mr. Buffett was talking about. Buffett was discussing his investment strategies and history with a group of MBA students in the late 1990s. At this particular point Buffett was discussing Bill Clinton’s social health care plan that he announced during his presidency. After President Clinton released the plan, health care stocks stumbled and, according to Buffett, Berkshire didn’t buy any healthcare stocks at the depressed prices. Buffett called this a sin of omission.
Buffett believes that his sins of omission are the most costly to investors of Berkshire. Why? Well, a stock can only go down 100 percent, but it can increase tens of thousands of percent. Often times the potential reward of a great company outweighs some short term losses that may result from any stock purchase. However, the key words are great company. Buffett only invests in superior firms. If he would have made investments after this health care plan announcement, he probably would have bought companies like Johnson & Johnson (which he now owns, ironically) that were superior to their competitors in almost every way.
I am sure that every investor has had their own sins of omission. I personally have missed on some multi-bagger companies due to my own inaction. As frustrating as this is, hopefully I learn can learn from these mistakes and purchase great companies once I find them at reasonable prices.
The “sins of omission” lesson can also apply to holding onto a great company (which is counterintuitive, but here me out). Often times, investors sell a great company just because a large run-up has occurred. This is the surest way to miss out on the ten-baggers. Sticking to the moral of the story, selling too early would be your “sin of omission.”
Just because a company has increased significantly and may be a little overpriced doesn’t mean you should sell. After all, how will you know when to buy back in? Also, if you sell you will have to deal with brokerage fees and taxes will negate all the fruits of your effort. In this case, the “sins of omission” lesson tells you that omission is the best policy.
As Buffett has said over and over, the key to great investing is identifying top companies and buying them at a fair price. The lessons from Buffett’s “sins of omission” are just another example of his classic investment strategy.