The 5 Worst Things Investors Can Do in 2023, According to Warren Buffett

 They're something that coaches hate to see in sports. The idea also carries over into investing. Sometimes, investors' mistakes can be their undoing.

What should you especially try to avoid in the new year? Here are the five worst things investors can do in 2023, according to Warren Buffett. 

 1 . Trade too frequently 

Buffett wrote to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders in 2015 about several mistakes investors can make that cause owning stocks to be riskier than it should be. His wisdom is as applicable now as it was back then.

At the top of Buffett's list was active trading, i.e., trading too frequently. In particular, selling too soon can reduce your total returns. Remember that Buffett's favorite holding period is forever. He doesn't always hold stocks for long periods, of course, but that is his goal.

Buying too often can be problematic as well. The legendary investor would almost certainly tell you to not buy any stock in 2023 unless it's available at an attractive price compared to the low end of its earnings projections over a period of five or more years.

 2. Try to time the market 

Buffett ranks among the most successful investors of all time. But even he acknowledges that he can't accurately time the market. He doesn't try to do so. And he thinks it's a mistake for any investor to attempt it.

The Oracle of Omaha pretty much ignores market movements. He told CNBC in 2018:

I never have an opinion about the market because it wouldn't be any good, and it might interfere with the opinions we have that are good. If we're right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do... If you're right about the business, you'll end up doing fine.

 3. Don't diversify enough 

Some don't think that Buffett is a fan of diversification. After all, he once stated, "Diversification is protection against ignorance. It makes little sense if you know what you are doing." However, he included lack of diversification as one of the top five mistakes that investors make in his letter to Berkshire shareholders written in 2015.

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The truth is that Buffett firmly believes in diversification to reduce risk. Just look at Berkshire Hathaway's portfolio. It includes close to 50 stocks from a variety of industries. Berkshire's subsidiaries also span multiple sectors.

 4. Pay too much in fees 

You've probably heard the expression, "Death by a thousand cuts." That's a pretty good description of another big mistake that Buffett warns investors about -- paying too much in fees.

It's not surprising that Buffett isn't keen on paying high fees to investment managers. The problem, as he wrote nearly eight years ago, is that most advisors "are far better at generating high fees than they are at generating high returns."

 5. Use leverage 

In a 2018 CNBC interview, Buffett said, "My partner Charlie [Berkshire Hathaway vice-chairman Charlie Munger] says there is [sic] only three ways a smart person can go broke: liquor, ladies, and leverage. Now the truth is -- the first two he just added because they started with L -- it's leverage." 

Buffett thinks that investors who use borrowed money to buy stocks make a huge mistake. He firmly believes that doing so can wipe out solid returns that they could otherwise generate.

Shakespearean tragedy

All investors would probably be better off if they paid heed to Buffett's warnings. But too many make one or more of the five mistakes he identified.

Failure in investing almost always results from investors' own mistakes. As Buffett wrote in 2015, "Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare: 'The fault, dear Brutus, is not in our stars, but in ourselves.'"

 

*Stock Advisor returns as of January 9, 2023

 

Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.