Even Buffett Has Investment Lessons to Learn

ByJoe Mont


BOSTON (TheStreet) -- Even the Oracle of Omaha has those investments he might do over if given the chance.

In a recent annual letter to Berkshire Hathaway shareholders, an eagerly awaited piece of investing insight, Buffett cops to several mistakes. Among them: authorizing the purchase of a large amount of ConocoPhillips stock when oil and gas prices were near their peak. A dramatic fall in energy prices soon followed.

"The terrible timing of my purchase has cost Berkshire several billion dollars," Buffett wrote, segueing into regret over a $244 million parlay in two Irish banks "that appeared cheap" but soon incurred an 89% loss on the initial investment.

There is hardly an investor, pro or amateur, who doesn't have some woeful tale of a sure thing that wasn't or can't-miss advice that did.

"The tennis crowd would call my mistakes 'unforced errors,'" Buffett said.

When a Buffett, Bill Gross or Larry Fink publicly discusses bad decisions, it makes headlines. But there is hardly an investor, pro or amateur, who doesn't have some woeful tale of a sure thing that wasn't or can't-miss advice that did. The key is learning from mistakes and moving on.

Take profits when you have them and don't get greedy -- a lesson learned the hard way by Jonathan Polson, a financial adviser for Wells Fargo Advisors in South Carolina.

(Read? Be Far Better At Selling Than At Buying? (Re-visit))

"When I was in college, I traded options on the side," he says. "One trade was with Services Acquisition when it was buying Jamba Juice. I had some massive gains on calls, up 45%, then 60%. Well, I became greedy, thought the rise would continue and I would just double my money. What ended up happening was that I let my gains become losses."

Later on, in 2007, he recalled having held on too long when, as a working professional, his "clients were up big and didn't want to sell."

"I simply told them it's time to take the gains before someone else takes them from you," he says. "I have made it a discipline ever since to take profits once I hit the 20%-plus mark. Even if it still goes up some, it's a disciplined approach that can keep my clients from some pain."

Joseph Montanaro, a certified financial planner for USAA, says that, as a younger man, he made the mistake of not preserving savings as an emergency fund, instead taking on an unhealthy dose of risk.

"In the late '90s, everything was grow, grow, grow," he says. "I decided, 'Why leave money sitting on the sideline in cash when I could make big money?'"

He followed that seemingly ideal plan, putting money he had saved for a rainy day directly into the stock market.

"Flash forward to 2002, I'm getting ready to take a new job in San Antonio and ended up having to cash out the investments, which had been hammered, in order to cover moving expenses," he says. "Not heeding the lesson of keeping an emergency fund in place ended up costing me a whole lot. My assets were down 60% to 70% of what they would have been had I just left them in savings."

He often tells clients of that error in judgment to keep them from doing the something similar.

"It is hard to get excited about savings, but there is certainly a purpose, a place and, as my example indicates, a reason."

Sometimes even well-meaning advice can cause more harm than good.

Montanaro still less than fondly recalls the first stock he ever bought, a purchase made while attending the United States Military Academy at West Point.

"It was a bull market environment," he says. "You could throw a dart at the wall and you were going to be a winner. I had a personal finance class and the professor, a captain in the Army, was sharing his stock picks with us, one of which was Crazy Eddie."

Crazy Eddie was a chain of consumer electronics stores, perhaps best known for commercials featuring screaming co-founder Eddie Antar and the pronouncement that prices were so low they were "insaaaaaaaaaaaaane."

"He gave us this idea," Montanaro says. "So we decided we were going to pool our money and buy that stock."

Buying shares in August 1987, they saw it go up a bit. Then came a nosedive following the stock market crash of Black Monday.

Things only got worse when fraudulent business practices led to a grand jury investigation, an SEC inquiry and jail time for Antar (who, for a time, tried to hide out in Israel after cashing out millions of dollars of stock). The company went bankrupt, its shares rendered worthless.

"That was the first stock I picked, but it wasn't the last one by any means," Montanaro says. "Even after having experienced that I still had a little bit of that gunslinger in me, the confidence that I could pick the right stocks."

These days, he preaches a compromise between that risky instinct and not getting burned.

"I've got the core part of my portfolio that is going be broad-based indexes and things like mutual funds," he says. "I may still tinker a bit on the periphery of the market, but not to the level that if I lose that money it is going to put my financial situation at risk. I share that with people all the time. Hey, if you've got that desire I understand it. But limit it to such a level that whatever happens, good or bad, doesn't put you at risk."

As far as bad advice goes, Daniel Shaffer thinks the media doles out its fair share.

"People need to see the bigger picture and not the day-to-day hype we hear from the media," says Shaffer, president and CEO of Harrison, N.Y.-based Shaffer Asset Management. "There are people I have spoken to who are literally glued to the media and make decisions based on what they hear."

"There is a major divergence between financial advisers being bullish and their clients who are not," he adds. "They can't convince their clients to get into the market."

Shaffer, whose book Profiting in Economic Storms: A Historic Guide to Surviving Depression, Deflation, Hyperinflation and Market Bubbles was released last month by Wiley, says he relies "on a technical analysis of the market and a longer-term view." His bearish advice: "Short this market, wait for the next few years and slowly inch into real estate investment trusts or other types of real estate."

Shaffer says that many investors would do well to trust their own instincts and observations, and not be pushed into a given strategy by advice that doesn't feel right to them.

"In this day and age, with the click of a computer, you can get 10 different opinions," he says. "People need to realize what their risk level is and what their beliefs are. Sometimes they could be just as good, if not better than, what they are hearing or reading in the news. Some people have a gut feeling because they are in the business arena, not in the investment arena, and they have a good pulse on what is really happening with credit and their customers and cash flow. They are right in the heart of it."