Unforced errors. They are something coaches hate to see in sports. The idea extends to investing as well. Sometimes investors’ mistakes can be their downfall.
What should you especially try to avoid in the new year? Here are the five worst things investors can do in 2023, according to Warren Buffett.
1. Trade too often
Buffett wrote Berkshire Hathaway (BRK.A: -0.38%) (BRK.B: -0.40%) In 2015, shareholders are aware of several mistakes that investors can make that make owning stocks riskier than they should be. His wisdom is as applicable now as it was then.
At the top of Buffett’s list was active trading, meaning trading too often. In particular, selling too early can reduce your overall return. Remember, Buffett’s favorite holding period is forever. Of course, he doesn’t always hold the stock for long, but that’s his goal.
Buying too often can also be problematic. The legendary investor will almost certainly tell you not to buy a stock in 2023 unless it’s available at an attractive price compared to its low earnings forecasts for five years or more.
2. Try to time the market
Buffett ranks among the most successful investors of all time. But even he admits he can’t time the market precisely. He doesn’t try to do that. And he thinks it’s a mistake for any investor to try.
The Oracle of Omaha is almost oblivious to market movements. He told CNBC in 2018.
I never have an opinion about the market because that wouldn’t be good and it might interfere with the opinions we have that are good. If we are right about the business, if we think the business is attractive, then we would be very foolish not to take action in that direction because we have thought something about what the market is going to do. If you are right. as far as business goes, you’ll do well in the end.
3. Don’t diversify enough
Some do not think that Buffett is a fan of diversification. After all, he once announced. “Diversification is protection against ignorance. It makes little sense if you know what you’re doing.” However, he listed a lack of diversification as one of the top five mistakes investors make in his 2015 letter to Berkshire shareholders.
The truth is, Buffett is a firm believer in diversification to reduce risk. Just look at Berkshire Hathaway’s portfolio. It includes about 50 stocks from different sectors. Berkshire’s subsidiaries also cover many industries.
4. Pay too much in fees
You’ve probably heard the phrase “Death by a thousand cuts.” That’s a pretty good description of another big mistake Buffett warns investors about, paying too much.
No wonder Buffett doesn’t want to pay high fees to investment managers. The problem, as he wrote about eight years ago, is that most consultants “are much better off with high fees than high returns.
5. Use leverage
In a 2018 CNBC interview, Buffett said: “My partner Charlie [Berkshire Hathaway vice-chairman Charlie Munger] says there is [sic] There are only three ways a smart man can fail: liquor, ladies, and leverage. Now the truth is, the first two he just added because they started with an L, that’s leverage.”
Buffett believes that investors who use borrowed money to buy stocks are making a big mistake. He firmly believes that doing so could wipe out the solid returns they might otherwise generate.
A Shakespearean tragedy
All investors would probably be better off if they heeded Buffett’s warnings. But too many make one or more of the five mistakes he mentions.
Investment failure almost always results from the investors’ own mistakes. As Buffett wrote in 2015, “Decades ago, Ben Graham pointed to the blame for investment failure using a quote from Shakespeare: “The fault, dear Brutus, is not in our stars, but in us.”
Keith Speights holds positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool offers the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 calls on Berkshire Hathaway and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.