September 27, 2008

Every Mistake is a Deja Vu Mistake… Just Ask Warren Buffet

It's my firm belief that every mistake you will ever make has already been made by someone else previously. Hence, every mistake is in the grand scheme of things a deja vu mistake.

The trick of course is to find the person who has already made the mistake you're on the verge of making… learning from his/her misfortune so that you may prevent a disaster yourself.

The Wall Street Crisis

Let me use the recent Wall Street crisis as an example. During the several television and radio interviews I gave on the crisis I mentioned that this crisis is not a new one. In fact a crisis very similar to this happens ever 10 - 15 years. The banks generally lend more money than is wise (and in the process borrow more money themselves than they should), "stuff happens" that wasn't anticipated, there was no margin of error given how aggressively these banks were managed, and the banks hit a major crisis.

Suddenly, the get financial conservatism religion, stop doing stupid things, and do things right. Of course this big problem amongst all banks is they have a really short term memory. After many years go by, and the last crisis has been forgotten, they get greedy and overly aggressive all over again. Historically this happens every 10 - 15 years or so.

But in banking at least, history has repeated itself quite consistently.

Here's a very interesting commentary from someone who should know… It's a "must read" even if you're not really into finance, wall street or banking.  There is a very important lesson at the end of this post that's not to be missed.

Remarks by Warren Buffet

The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.

…Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's numbers were to be trusted.

…risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run.

My Comments on Warren Buffet's Remarks

I think Buffet's remarks hit the nail on the head. Translated, he says banks generally take on way too much risk and the slightest hiccup can cause a major financial disaster.

What I found most amazing about these remarks is the Warren Buffet made them in the year 1990. They were made in the Berkshire Hathaway 1990 Shareholder Letter in response to the crisis in banking in 1990.

Like I said, every mistake you're about to make has already been made by someone else previously. The trick is to find that person and learn from them BEFORE you make the same mistake.

Incidentally, the first two chapters of my book Bookmercial Marketing was based on the major marketing mistakes I made earlier in my career. To be fair to myself, everybody was making the same mistakes at that time.  So I admit, I was one of those lemmings that Buffet was talking about.  But I figured out what we were all doing wrong at the time (and most people continue to do wrong), and show my readers how to avoid these major, yet quite common, marketing mistakes.

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