Mistakes of omission and mistakes of commission

Investors should try best to avoid of The mistakes of omission.

In my book “The Rules of Super Growth Stocks Investingock Investing Rules” Chapter 5, 5-2, I mentioned Buffett’s admission of the biggest investing mistake he has made in recent years. And also in 5-2, one of Buffett’s stubborn and undeserved mistake that cost him $10 billion. He’s willing to admit mistakes and review them, which is what makes Buffett great.

For Buffett’s most worthy investors to learn, I suggest you refer to my other blog article “Why Buffett deserves further study? “

Table of Contents

Mistakes of omission

In 1998 at the University of Washington Business School, Buffett was with Bill Gates, and explained “I’ve made all kinds of bad decisions that have cost us billions of dollars. They’ve been mistakes of omission rather than commission. I don’t worry about not buying Microsoft (ticker: MSFT), though, because I didn’t understand that business. And I didn’t understand Intel (ticker: INTC).

But there are businesses that I did understand–Fannie Mae was one that was within my circle of competence. I made a decision to buy it, and I just didn’t execute. We would’ve made many billions of dollars. But we didn’t do it.”

In Berkshire’s shareholder letter in 1991, Buffett wrote: “In early 1988, we decided to buy 30 million shares. After we bought about 7 million shares, the price began to climb. In frustration, I stopped buying (a mistake that, thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program). In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned.

I wish I could give you a halfway rational explanation for my amateurish behavior vis-a-vis Fannie Mae. But there isn’t one. What I can give you is an estimate as of yearend 1991 of the approximate gain that Berkshire didn’t make because of your Chairman’s mistake: about $1.4 billion.”

Buffett did not invest in WalMart (ticker: WMT) is just one example of a mistake of omission. Buffett has admitted that just this one mistake with WalMart cost them $10 billion. In 1973 Tom Murphy offered to sell some television stations to Berkshire for $35 million and Buffett declined. “That was a huge mistake of omission,” Buffett has admitted.

Warren Buffett’s biggest mistake of omission might be dumping Disney (ticker: DIS)— twice. Buffett had held combined 8.6% stake in Disney. He bought 5% stake from Walt Disney in 1966, received a 3.6% stake after Disney bought Capital Cities/ABC 30 years later. However, Buffett swiftly sold his Disney shares on both occasions, potentially leaving US $25 billion on the table.

Mistakes of commission

A mistake of omission is you fail to act on good information. You don’t do something you should have done. A mistake of commission is the opposite. You act on information. You do something you shouldn’t have done. You do something wrong.

A mistake of commission is easy to point to and see an error, especially in terms of investing. You can point to a bad investment and actually calculate the loss.

Avoid mistake of omission to regret

A mistake of omission is far more difficult to observe, specially in terms of investing, because there might be no investment loss, since there was never an investment in the first place. Buffett has admitted how his mistakes of omission have actually been far greater ( cost to Berkshire Hathaway shareholders) than his mistakes of commission over the years. Because mistakes of omission is in his circle of competence, he should not make such mistake at all.

Mistakes of omission — credit: RODNAE Productions

What Buffett once said–the missed opportunities I said are related to the scope of my ability, that is, things that I can understand, fully understand, but do not spend the least amount of time. I just stood still, this is the real mistake. He himself admitted: Even though we knew it was cheap, we didn’t invest early and missed the opportunity to get paid. As far as investment in the technology industry is concerned, he did not act early to invest, such targets include Amazon (ticker: AMZN) and Alphabet (ticker: GOOGL and GOOG), especially Alphabet because GEICO uses Google online advertise to lower cost. He should know it’s should be a good deal to invest Alphabet.

In short, like Buffet said, investors should focus on never miss opportunity in your circle of competence, or you will regret and lose huge.

The most egregious mistakes

In Berkshire’s shareholder letter in 1991, Buffett again examined one of the most significant types of mistakes he had ever made. The original text is as follows.

Typically, our most egregious mistakes fall in the omission, rather than the commission, category. That may spare Charlie and me some embarrassment, since you don’t see these errors; but their invisibility does not reduce their cost. In this mea culpa, I am not talking about missing out on some company that depends upon an esoteric invention (such as Xerox), high-technology (Apple), or even brilliant merchandising (Wal-Mart). We will never develop the competence to spot such businesses early. Instead I refer to business situations that Charlie and I can understand and that seem clearly attractive – but in which we nevertheless end up sucking our thumbs rather than buying.

Interpretation by Charlie Munger

Charlie Munger further said in his usual forthright speech, “There are two kinds of mistakes: first, do nothing (see the opportunity but put it on the shelf), Buffett calls this “finger-sucking mistake”; second, we only buy the amount of potion bottles when we are supposed to buy things in piles.”

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