With the release of Warren Buffett's 2009 investment letter, investors everywhere read his commentary on his past actions as well as general views about the economy. But perhaps the best lessons are sometimes hidden behind the words. It requires a careful examination of his letters to fully capture the genius of Buffett and integrate his wisdom into your portfolio.
True, Warren Buffett has had a tough 18 months. And as has occurred many times in the past, he is being written off by some as an outdated investment great whose strategies hold no merit in 2009. How short our memory is. For the sake of this blog, let’s assume he has something to share with us -- a dose of wisdom.
These are pretty obvious insights. The hard part is stopping for a moment and making them part of what you do as investor. See how these fit for you.
More on Buffett
- Buffett: I Did 'Some Dumb Things' in Investing in '08
- Buffett's Letter Generates 'Worst' Headlines
- Warren Buffett Watch
Don't be afraid to admit you've made a mistake. Ever travel down a dark road and suddenly realize you've gone the wrong direction? I suppose it might be comforting to continue to go down that same path so you don't have to admit you made a mistake. But really is that wise? Okay so Buffett bought an oil company at the height of the oil bubble. He bought Irish banks that blew up. Bad move as he states himself. But does he wallow in his mistake? No, he admits his error.
An adjustment requires the courage to face things as they are, not as you wish it would be. Look at your portfolio today and ask yourself if you would invest in the same assets if you had cash. If the answer is no, you need to consider making a change. even if it hurts to do so.
Don’t bet more than you can afford to lose. When Buffett loaned money to General Electric and Goldman Sachs he could've taken the money from cash, he didn’t. Instead he sold assets to raise additional cash so that he could maintain his significant conservative cushion. This is discipline in action.
The lesson here: don't be greedy and make sure you protect on the downside. Going all in as an investment strategy works if you win. It kills you if you lose. Consider carefully if you're willing to take that risk. And in a world where we are all eager to climb out of a nasty bear market, tread carefully. Don’t try to climb the mountain all at once; step by step is a safer path.
Learning from others is the secret to great investing. You don't need to act like Warren Buffett or invest exactly like him to be successful. It matters not what he buys, what matters is how he thinks. That's how to read his words. Soak in his wisdom and profit from his perspective. Read between the lines and make it your own.
There is no one path to investment success and there is plenty of wisdom in the world to learn from. Grab it when it's provided. Buffett's letter is a good place to start.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at email@example.com.