Warren Buffett leaves behind an 'enemy list' for every investor

Warren Buffett is stepping down as chairman of Berkshire Hathaway, ending a six-decade run in which he turned a failing textile company into a conglomerate worth more than $1 trillion. He will become chairman emeritus and remain on Berkshire’s board while his son Howard takes the chair.

Buffett’s investment philosophy has always sounded deceptively simple. Think of a stock as a piece of a business, buy it at a sensible price and let time do the work. What made that philosophy so difficult to follow was not the mathematics but the enemies inside the investor’s own mind.

For Buffett, the market was populated by perfectly ordinary human impulses that became dangerous when money was involved. Fear could turn a falling price into a reason to sell just as greed could make an expensive asset look irresistible. Envy could make another investor’s gains feel like a personal loss while the crowd could make an idea appear safer simply because everybody else owned it.


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Over six decades, Buffett built a philosophy that was in large part an exercise in resisting those impulses. As his company gave almost 20% CAGR over 60% years, Buffett pointed out several key human traits which, if not handled well, would prevent an investor from making money. One can call them an investor's 'enemies'. Below is an 'enemy list' based on Buffett's ideas:

Fear and greed: The market’s two recurring diseases

Buffett did not regard fear and greed as occasional glitches in the financial system. He regarded them as permanent features of it. In his 1986 shareholder letter, he called fear and greed “super-contagious diseases” that would “forever occur in the investment community.” He added that their timing could not be predicted. The point was not to forecast when panic or euphoria would arrive, but to be prepared to behave differently when they did.

That produced one of his best-known formulations -- “Be fearful when others are greedy and be greedy only when others are fearful.”

The phrase is often repeated as a piece of Buffett folklore. Its context is more revealing. He was describing an attempt to reverse the natural emotional response to prices. When everyone wants an asset, its popularity itself becomes a reason for caution. When everyone wants out, the falling price can become a reason to investigate rather than flee.

At Berkshire’s 2010 meeting, Buffett put the problem in terms of temperament. If an investor becomes frightened whenever other people are frightened, he said, “you are not going to make a lot of money” in securities over time.

He had seen the same mechanism during the financial crisis. His 2013 shareholder letter recalled that during the panic of 2008 he never considered selling his farm or New York real estate merely because a recession was coming. If he had owned a solid business outright, he said, selling it would have been foolish. Stocks, he argued, were simply small pieces of businesses.

Buffett was not claiming that fear is always wrong but was trying to prevent fear from becoming a substitute for valuation.

Impatience, restlessness and the urge to act

Buffett’s answer to another powerful human impulse was to sometimes do nothing. The pressure to act is particularly strong in investing because every day brings new prices, headlines and supposed opportunities. Sitting with cash can feel like falling behind. Buffett repeatedly treated that feeling as a trap.

In his 1999 letter, while the dot-com boom was raging around Berkshire, he wrote that the company could recognize when it was nearing the edge of its “circle of competence.” If other investors appeared to possess skills Berkshire lacked, Buffett said, “we neither envy nor emulate them.” Berkshire would stick with what it understood. If it ever strayed, he wrote, it would be because it had “got restless and substituted hope for rationality.”

That sentence gets unusually close to the psychological machinery behind Buffett’s restraint. The danger is not simply that an investor sees something new but it is becoming uncomfortable with not owning it.

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Buffett had another name for the condition. At the 2003 annual meeting, Charlie Munger said a “fretful disposition” was an enemy of long-term performance. Buffett responded that it was almost impossible to do well in equities if you went to bed every night thinking about their price. “We think about the value of them,” he said.

The distinction between price and value was central to Buffett’s method. Price changes demand attention but value changes more slowly. This is also where his famous 20-punch-card thought experiment figures. Buffett once suggested that an investor imagine being given a card with only 20 punches on it, with each punch representing an investment decision for a lifetime. The exercise was designed to make each decision feel consequential rather than disposable.

The point was not that Buffett literally made only 20 investments in his life but that scarcity could force an investor to think harder before acting.

Envy and the need to keep up

Greed wants more, and envy wants what somebody else has. Buffett explicitly discussed the difference. At Berkshire’s 2006 meeting, he described a person receiving a $2 million bonus who is perfectly happy until discovering that a colleague received $2.1 million. Suddenly, the first person is miserable. Buffett said envy was probably a bigger motivation than greed when people wanted to reach the top of a compensation hierarchy.

A person who owns a sensible business can become dissatisfied when a neighbor doubles his money in a fashionable stock. The first investor has not actually lost anything but his reference point has changed.

Buffett confronted this problem directly at Berkshire’s 2016 meeting. Investors, he said, should not envy people who make money through risky behaviour. “You don't want to get into a stupid game just because it's available,” he said.

His 1999 letter offered an unusually candid example. During the technology boom, Berkshire could see that other investors appeared to have predictive abilities in industries Buffett did not understand. He did not deny that they might be making money. He simply refused to follow them. “Neither envy nor emulate them,” he wrote.

That is one of the less celebrated parts of Buffett’s philosophy. Independence is not only the courage to buy when others are selling. It is also the ability to watch other people get rich without feeling compelled to join them.

Herd instinct and the seduction of excitement

Buffett’s deepest suspicion was reserved for the moment when individual human impulses become collective behaviour. At Berkshire’s 2007 meeting, he described how even highly intelligent people can behave irrationally “en masse.” He pointed to periods such as 1998 and 2002 and warned that these episodes become more likely when people are trying to beat markets day after day.

This is why Buffett’s hostility to market chatter was more fundamental than a preference for quiet. In 2002, he said a great investor needs “an ability to detach yourself from the crowd.” He also said investing requires insulating yourself from popular opinion. Once an investor starts treating the opinions of other people as information that must be acted upon, independent judgment begins to disappear.

The danger is particularly acute during a boom because rising prices appear to validate the crowd.

Buffett dissected this phenomenon in a 1999 Fortune article written with Carol Loomis. Once a bull market gets going, he wrote, people are drawn into stocks not because of interest rates or profits but because it seems like a mistake to be left out. He compared the effect to Pavlovian conditioning -- the market opens and people have learned to expect to be rewarded.

That was Buffett’s behavioural insight before behavioural finance became mainstream.

Ego, overconfidence and the inability to say “I don’t know”

Buffett’s defense against ego was partly intellectual humility. In 2002, when asked what mental attributes make a great investor, he said that investors need to define their circle of competence accurately and “know what you don't know and not get enticed by it.”

This may sound modest, but it imposes a severe restriction. The investor must accept that there are lucrative opportunities he cannot understand.

Buffett encountered that problem repeatedly. During the technology boom, he knew the internet was changing business. What he could not determine was which companies would retain durable advantages and what those businesses were worth. In his 1999 letter, he said predicting the long-term economics of fast-changing industries was beyond Berkshire’s perimeter.

His refusal to participate became particularly striking because the market appeared to reward those who did.

The same principle explains Buffett’s repeated willingness to discuss his own mistakes. His 1999 letter, after Berkshire badly lagged the S&P 500, did not offer elaborate excuses. Buffett graded his own capital allocation a “D.” Investment errors become more expensive when an investor becomes attached to being right. Buffett's letters are full of such postmortems. He treated mistakes as information that should alter future decisions rather than injuries to his reputation.

The deeper battle: Resisting the market’s emotional clock

Buffett’s philosophy looks less like a collection of rules for finding wonderful companies and more like a system for preventing an investor from sabotaging his own returns. After learning from Benjamin Graham. widely known as the "father of value investing", to regard a stock as a piece of a business rather than something that merely “wiggles up and down,” Buffett said an investor has a foundation for thinking rationally. But rational thinking alone is not enough. “Certain matters of temperament” are enormously important, he said.

Buffett never described all these tendencies as his personal 'enemies'. The word interprets a theme that runs through his work. He repeatedly described fear and greed as recurring diseases, called emotional market behaviour contagious and warned about restlessness, envy and the inability to detach from popular opinion.

Perhaps the most revealing line came from his 1987 shareholder letter, when he said successful investing requires the ability to insulate one’s thoughts and behaviour from the emotions swirling through the market.