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Chapter 1. Sages and Charlatans: Avoidin... > Red Flag 1: If You Can’t Understand,...

Red Flag 1: If You Can’t Understand, Don’t Invest

The sage of Omaha, legendary investor Warren Buffett, has always urged investors to define what they don’t understand—and steer clear of it. “Paradoxically, when dumb money acknowledges its limitations, it ceases to be dumb,” he wrote in a shareholders’ letter in 1993. His comment was in reference to the man on the street who did better than the professional investor by putting his money in a fund based on a benchmark stock index. And, in 1999, at the height of the Internet stocks craze, Buffett explained why Berkshire Hathaway didn’t own any technology shares by saying that he had “no insights into which participants in the tech field possess a truly durable competitive advantage.” He added, “Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.”


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