Warren Buffett: Why Saying No Works
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Warren Buffett (Trades, Portfolio) has a theory about why some investors are successful and others aren't. He once said, "The difference between successful people and really successful people is that really successful people say no to almost everything."
This is another one of his quotes that say far more on further examination than they do immediately. Saying no to everything obviously isn't a strategy that will get one far. Ignoring opportunities when they come along can be detrimental to one's growth and development as an investor. However, investors need to be selective when choosing stocks to avoid overextending themselves or falling outside their circle of competence.
Being selective
Buffett attracts a lot of criticism for not correctly timing his entry into technology stocks when they started to emerge in the late 1990s and early 2000s. But this criticism ignores a crucial point. It's very easy to say that he should have been investing in technology stocks based on what we know today. That's the easy part. What was not easy at the time was gaining enough industry expertise and picking the winners over the losers.
At the time, Buffett didn't understand tech, and he wasn't going to jump into the sector just because everyone else was. He had been using this mentality for years, and it had worked. He wasn't going to change overnight.
The thing is, some tech stocks have been great investments, but many once-popular names have fallen flat. Buffett has been investing since the 1950s. He's seen many investment fads come and go during this period. There was no telling at the time that the tech revolution would become so big.
Buffett missed some opportunities, but he hasn't regretted it. Back in May 2019, in an interview with Yahoo Finance editor in chief Andy Serwer, when talking about tech stocks, Buffett stated:
"I don't worry about the things I miss that are outside my circle of competence of evaluating... I have missed things that were within my circle, and that's a terrible mistake. Those are my biggest mistakes. You haven't seen them. But... it's not a mistake because I miss Netscape or something like that."
This quote reveals the other side of the equation. Yes, Buffett missed the tech winners, but he also missed the losers. That's what really matters, and it's why Buffett believes saying no to "almost everything" works. As he wrote in his 1996 letter to shareholders:
"Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word 'selected': You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence...The size of that circle is not very important; knowing its boundaries, however, is vital."
I think investors and analysts often spend too much time concentrating on what has gone right rather than evaluating what has gone wrong.
We can look at Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) today and state that it was a mistake for Buffett not to buy certain highly successful tech stocks, but that's only with the benefit of hindsight. He has spent decades trying to avoid disasters, and he has established a surefire way of doing that; avoid anything he doesn't understand. Throughout his lengthy career, this has worked incredibly well, and it is still working incredibly well. Of course, he could have done better, but anyone can do better if they know what the future holds.
That's the big challenge every investor has to deal with. It's impossible to tell the future, and the only way to swing the odds in our favor is to stick with the strategies that work and say no to everything else.
This article first appeared on GuruFocus.
