In the realm of investing, Warren Buffett reflects on a concept he aptly terms “thumbsucking,” a phrase coined by his long-time partner Charlie Munger. Thumbsucking, as Buffett describes it, occurs when investors hesitate on glaringly obvious opportunities or, more commonly, when they take too modest a position in a stock to reap substantial benefits. These instances, deemed “stakes of omission” by Buffett and Munger, represent missed opportunities and the accompanying opportunity costs.
Addressing this phenomenon at the 2001 Berkshire Hathaway annual meeting, Buffett clarified their perspective on errors. He asserted, “We only regard errors as being things that are within our circle of competence. So if somebody knows how to make money in cocoa beans, or they know how to make money in a software company or anything, and we miss that, that is not an error, as far as we’re concerned.”
For Buffett, an error occurs when they overlook an opportunity within their understanding and fail to take action. Even more frustrating, he notes, is when they do act but in a small, insufficient manner when a more substantial investment was feasible. Munger humorously refers to this situation as Buffett “sucking his thumb.”
Buffett acknowledges instances where Berkshire Hathaway has been guilty of thumbsucking, particularly with businesses well within their comprehension. He identifies various reasons for this, such as starting to buy and then waiting for the price to return to the initial level, among other factors.
The takeaway from Buffett’s insights is clear: Thumbsucking, or hesitating on opportunities within one’s realm of understanding, can lead to missed potential and opportunity costs. Investors are reminded to act decisively when they recognize opportunities, avoiding the pitfall of indecision or insufficient commitment. In the dynamic world of investing, the cost of thumbsucking can be substantial, emphasizing the importance of seizing opportunities with a confident and informed approach.
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© 2023 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.