Learning From Buffets Mistaks

Buffett is the Chairman and CEO of Berkshire Hathaway, and the second- richest man in the world according to the Forbes list of the 400 richest people. He's also known as the world's best investor.

So then, why is he outing his mistakes to millions?

"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action," he announced in his latest letter to shareholders.

But it's that very admission of guilt that makes Buffett what every investor should aspire to be. It's what separates Buffett from the stockerati that tries so hard to imitate him.

After all, Buffett's performance could have been much worse for the year. In 2008, Berkshire Hathaway outperformed the S&P 500 by 27.4%, meaning that the Oracle of Omaha's investments held up significantly better than the rest of the stock market.

Others would have touted the year as a success - after all, he performed better than most mutual funds, a plethora of hedge funds, and most individual investors - Buffett didn't.

Three Lessons to Learn from the Oracle's Mistakes

Because those who forget their stock market mistakes are doomed to repeat them:

Don't Seek Approval - Per Buffett, "Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re- examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

Understand What You Own - "Recent events demonstrate that certain big- name CEOs (or former CEOs) at major financial institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include Charlie [Munger] and me in this hapless group," he said.

The Market Can Be Wrong - "The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today's could have been obtained on good-grade municipal or corporate bonds even while risk- free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms."

It's hard to see the market clearly when things look as ominous as they do only three months into 2009. Sellers are overwhelmingly pushing the direction of the market today, but that pace can only be kept up for so long. Keep Warren Buffett's advice in mind, and you'll end this debacle with your head above water.