Warren Buffett Explains Why 'Approximately Right' Beats Being Precisely Wrong in Investing

Key Takeaways Warren Buffett has said, "It's better to be approximately right than precisely wrong." He means that investors often struggle because they prefer mathematical precision to sound judgment. The real challenge is maintaining simplicity and common sense amid complexity. Buffett has a talent for distilling important financial concepts down to one memorable sentence. For most retail investors, a crucial piece of advice is as follows: “It is better to be approximately right than precisely wrong.” Buffett’s own investment approach is that he only invests in businesses he understands, he evaluates the long-term economics, and always demands a margin of safety between the price and what he believes the company is worth.David Silverman / Getty Images There’s a subtle edge to it: the most common way investors make mistakes is not by having insufficient information, but by being seduced by precision-getting lost in spreadsheets, models, and forecasts-and then forgetting common sense. That is, the numbers can add up perfectly and still send you flying off a cliff. The Danger of 'Precisely Wrong' Investors today have access to more data, forecasts, and analysis than ever before. Stock prices update by the second. Valuation ratios have three decimal places. There are sophisticated risk models and AI forecasts of future cash flows. It all appears to be very scientific and reliable. However, the stock market often remains chaotic, emotional, and fundamentally uncertain. If you build detailed, finely-tuned models on top of uncertain and shaky assumptions about future growth rates, interest rates, and margins with complexity , you could end up “precisely wrong” far more often than you think. Some Common Ways To End Up 'Precisely Wrong' Over-optimized spreadsheets : Changing growth or discount rates by 0.1% turns a $100 “buy” into a negative “sell.” Precision is revealed as an illusion. Obsession with formulas : Valuation models like discounted cash flow have their uses, but they are still only estimates. That means garbage in, garbage out. Fixation on short-term earnings : Trying to forecast next quarter’s earnings to the cent will often matter less than understanding whether the business will be stronger in five or 10 years. Buffett isn’t suggesting that analysis is pointless. He’s saying that trying to make uncertain inputs yield certain outputs is dangerous. Precision is not the same as truth. Buffett famously likes businesses so simple that “an idiot could run them-because someday one will." That’s “approximately right” thinking put into action: look for situations where you don’t need to have the next few years mapped out just to break even. Tip Buffett’s quote also hints at an unstated fact: simplicity is hard to preserve. The more data you try to use, the more easily you can complicate your thinking. How To Be 'Approximately Right' in Your Portfolio You don’t have to be Buffett to apply his “approximately right” approach. Here are a few practical tips: Know your "circle of competence" : Stick to industries and businesses that you can actually understand . If you can’t explain to a friend...

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