What 25 Years of Investing Taught Me: 12 Mistakes Your Brain Keeps Making

Why smart investors keep falling into the same traps - and how to escape.

You probably don’t like to think about mistakes. I don’t blame you, most of us don’t. However, there is a good reason why the late, great Charlie Munger taught us to “rub your nose in your own mistakes.” That’s how we can improve.

You know what’s even better than learning from your own mistakes? You guessed it, it’s learning from the mistakes of others before you make them yourself.

In my 25 years of professional investing, I made many mistakes. I have observed even more made by others. Here are the top 12 investing mistakes so that you can avoid making them.

1. Not Understanding What You Are Investing In

When I had a chance to ask Warren Buffett what he looks for in a stock during my first Berkshire Hathaway annual meeting trip in 2002, he made it simple. He said that he starts out by looking out 10 years and seeing if he could roughly figure out the future key economic characteristics of a company that he is considering.

Just because it’s simple doesn’t mean it’s easy. In fact, Buffett is famous for his “too hard pile” where companies that he does not understand well enough go. Yet I have seen all too many investors focus on the irrelevant – short-term news, next year’s earnings projections, etc., while not really understanding what they are buying.

What you should do instead: Study the company carefully before even thinking about investing in it.

2. Not Focusing Enough on the Qualitative

Numbers are easy to find, especially in this day and age with reams of data at our fingertips. They feel concrete.

Qualitative attributes on the other hand are harder to figure out. You must use judgment. They are more nebulous.

So many beginners focus on what they can easily find – the numbers and ignore the qualitative attributes of a company.

What you should do instead: Assess the qualitative attributes of the business and the management together with the numbers.

3. Investing in Fragile Companies

It’s all too easy to focus on management’s guidance or what you think will happen to a business over the next year or two. The problem is that some companies are inherently more fragile than others.

Remember that the future can take many possible paths. You don’t know which one will play out. Some businesses are resilient to adverse developments while others melt at the first sign of adversity.

If you invest in the latter, all your forecasts won’t be worth much. Trust me, I know. As a young analyst at Fidelity, I forecasted that a company should have mid-cycle earnings of about $2.50 per share. With the stock at $20, this seemed like a good value.

Except that the company didn’t earn $2.50. It didn’t even earn $1. The actual earnings a few years later during a mid-cycle economic environment? About 25 cents. Oops.

What you should do instead: Ask yourself, what would it take for this company to make less money in 5 years than it is making today? What would it take for it to lose money? Better still, use a checklist approach, such as the Skeptic’s Checklist that I have developed.

4. Ignoring the Company’s Financial History

Will Danoff, the star manager of Fidelity’s Contrafund once asked Warren Buffett if his access to management gave him a big advantage as an investor. The answer from Buffett? “Nope. It’s all in the numbers.”

The numbers should tell you a story, just like management narrative does. Accounting and financial statements are a language, and if you understand it, you can learn a lot about the company and the kind of business it is from studying the numbers over time.

Yes, that takes work. But what did you expect? That you show up, pontificate some armchair philosopher superficial insights you heard on CNBC and call it good? I have never seen that work consistently for anyone over time.

What you should do instead: Take the time to study the numbers and understand the story they are telling you about where the business has been and how they inform where it might go.

5. Falling Victim to Behavioral Biases

Too often investors are eager to find the mistakes that others are making in the market. After all, that is what creates opportunities.

I bet that focusing on your own behavioral flaws is a lot less fun, isn’t it? However, it is just as crucial. Playing behavioral defense can help you avoid disaster and is as important, if not more so, than the behavioral offense that most people are focused on.

What you should do instead: Study behavioral biases and create systems to minimize them in your own investing.

6. Focusing on the Short-Term

Everyone wants to get rich quick. Besides, you are constantly bombarded by social media brags about how someone made a killing in this or that. So of course you want quick wins too.

The problem is that the short-term is incredibly hard to predict. Maybe someone can win at that game, but it’s probably not going to be you or me. As the old poker saying goes, if you can’t spot the sucker in the first 30 minutes of the game - it’s you.

The shorter the time period, the more you are trying to guess how other market players will react to new information. You are guessing how they are going to guess about how others are going to guess… you get the point. That game is just too tough.

What you should do instead: Focus on the long-term where there is a lot less competition, think about your edge and your circle of competence and stick to it.

7. Extrapolating the Recent Past Too Far into the Future

The market usually assumes that whatever has been happening lately will keep on happening nearly forever. Earnings growing rapidly? Let’s assume that will happen for the next 10+ years. Company going through a tough period? Of course it’s permanent.

Don’t get me wrong, sometimes that conclusion is exactly right. It’s just not always right, nor is it true just because of recent performance.

What you should do instead: Dig deeper. Get to the root cause of what has been happening to determine how sustainable, or not, the recent performance is.

8. Confusing Luck with Skill

Ever come across a post that reads something like ‘Bro, have you seen my returns?! I am up 100 gazillion% YTD, look at me!’

Well, let me tell you, short-term results are a lot more random than what most people would like to think. The only thing a person bragging about them is revealing isn’t their massive skills, but rather their lack of understanding of how investing really works.

What you should do instead: Focus on what you can control, which is your process. You should be proud of when you are executing your process well, regardless of the results. And if you are not following your process (or don’t really have one) but are getting good short-term results that’s nothing to brag about.

9. Failing to Consider the Opposing Viewpoint

Many investors think they are done when they have finished formulating their thesis. Wrong. You must think about the strongest possible counterargument to what you believe and then understand why it’s incorrect.

After all, the market is a very competitive place. Just because a stock is down, is cheap or the company is good doesn’t mean much in and of itself. For an investment to be mispriced you have to form a well-reasoned opinion of what someone who sees things differently from you is getting wrong.

What you should do instead: If you like a stock, don’t stop at your own research. Find someone – a short-seller, a negative sell-side analyst or even AI to get an informed opposite perspective. Sometimes it will help you avoid big losses down the road.

10. Paying Too Much

There are no one-decision stocks. The price always matters. If you don’t believe me, imagine the best company in the world and change its share price to $1 billion per share. Is it still a buy?

The people who think they can identify a good company and own its stock regardless of price are not likely to be consistently rewarded in one of the most efficient capital markets in the world. To be sure, there will be some expensive high-quality companies that still outperform the market. However, many such stocks will disappoint, even with good results, because their shares were pricing in an even better outcome.

Don’t believe me? Just ask Warren Buffett. He held on to Coca-Cola (KO) for the last quarter century despite being on the record that its stock was expensive. The result? He would have done way better in an index fund over that period – and 25 years is a long time.

What you should do instead: Understand what expectations are priced into a stock and why you believe the company will do even better.

11. Ignoring Management Incentives

I used to think that management incentives drive behavior. Perhaps to a degree they do.

However, in my 25 years of professional investing experience I realized that how management chooses to pay themselves is more of a reflection of their ethics and motivations than a driver of behavior.

If you see a management team paying themselves richly for poor performance, there is a good chance the company you are considering is being managed by folks who are just trying to transfer some of shareholders’ wealth into their own pockets. That’s not someone that you should do business with.

What you should do instead: Read the executive compensation section of the proxy statement carefully. If management can make a lot of money without a lot of value being created for shareholders, consider moving on.

12. Only Paying Attention to the Income Statement

Almost everyone starts with the Income Statement. That’s mostly what managements and Wall Street analysts talk about. What will EPS be next quarter or next year? Did revenues surprise to the upside?

Sure, the Income Statement is important. However, if you don’t analyze it in conjunction with the Balance Sheet and the Cash Flow Statement you are potentially making a big mistake. Not only will looking at all three statements in combination help you spot some frauds, but you will have a much more holistic understanding of the company.

What you should do instead: Treat all three financial statements as part of a greater whole and study them together.

Conclusion

If some of these investing mistakes seem to be opposites of each other, that’s not an oversight. Investing is hard. To be a good investor you have to avoid many, sometimes opposing, pitfalls. I hope that studying the above list of investing mistakes helps you make fewer of your own.

What investing mistake do you think should have made the list? Please leave a comment below, I read and respond to every one. And if this article helped clarify your thinking, please restack it to help others.

Disclaimer: Not financial advice, for educational purposes only.

About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.