Opportunity cost.
The mistakes you make of Commission are the ones by which performance is judged. They show up in a profit and loss and balance sheets of businesses. However, when you pass up a golden opportunity that turns out to be a winner, that ‘cost of potential profit’ does not show up anywhere.
It is a mistake of omission, not commission.
Those of us who failed to buy Apple shares when they were less than a dollar in 2003, and similarly, NVIDIA shares when they were $1.30, might see a missed opportunity. Both now trade at well over 100 times those prices.
However, such mistakes are acceptable when the opportunity is outside what Warren Buffett calls a ‘Circle of competence’. This is the area where you have the expertise to understand the opportunity being offered, but fail to accept it.
In the case of Apple and Nvidia, they are both outside my circle of competence. Therefore, I did not know enough to recognise the opportunity. Had I been immersed in the IT industry it might have been clearer.
Buffett’s seven rules for successful investing, summarised, are:
- Hire only intelligent people with integrity.
- Pay attention to facts, not emotions.
- Buy wonderful businesses, but not ‘cigar butts’
- Buy only stocks you understand.
- Seize the opportunity.
- Don’t sell because of price fluctuations.
- Buy stocks below what they are worth.
Passing up an opportunity that turns out to be something you should have grabbed, with the benefit of hindsight, means you have failed to give yourself an adequate answer to one, or more, of three simple questions.
- How much cash would the opportunity deliver to you?
- When are you going to get it?
- How sure are you?
Buffett and his late side-kick Charlie Munger are widely seen as geniuses. I suspect Mr Buffett would be embarrassed by that label. He might respond that all he did was follow the simple 7 rules, something most cannot do.
