These Warren Buffett quotes tell us exactly where Neil Woodford went wrong

It’s exactly a year since Neil Woodford’s flagship fund was suspended, and his reputation destroyed for good. Woodford was the UK’s most famous stock picker. At one point, CF Woodford Equity Income held more than £10bn.

That was before he made his mad lurch into small-cap and unlisted stocks, which he couldn’t sell when disgruntled investors wanted their money back.

If only he’d listened to sage advice the world’s most famous investor, Warren Buffett, has been dispensing for years, his reputation might be intact. Woodford’s downfall has a lot to teach us. Buffett knew it already.

1. Know what you’re doing

Buffett said: “It is not necessary to do extraordinary things to get extraordinary results.”

Woodford got extraordinary results for 25 years, by investing in ordinary UK equity income stocks, mostly listed on the FTSE 100. The only extraordinary thing about his portfolio was that it was more successful than almost everybody else’s. He chose his stocks well, because he knew what he was doing. 

After striking out on his own in 2014, he shifted into areas he didn’t understand. Smaller companies and unlisted start-ups. The smaller companies sector is fertile ground for managers who know what they’re doing. Woodford tried to make himself extraordinary. And failed. Which reminds us of another Buffett quote: “Risk comes from not knowing what you are doing.” Woodford didn’t.

2. Mistakes are expensive

Another Buffett quote also fits well here: “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

Woodford got so many things wrong. His top picks were disasters on an heroic scale. The AA, Allied Minds, Kier Group, PurpleBricks, Provident Financial and biotech firm Prothena all fell 70%, or more. This was in a bull market, remember, long before the Covid-19 crash.

There’s another half a billion pounds worth of illiquid, unlisted stocks still sitting in his fund that may have to be written off because nobody wants them. Some risk is necessary when investing, but you can take it too far. So why did he lose his magic touch? Here’s my view.

3. Don’t be arrogant like Woodford

Buffett said: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Woodford built his reputation over 26 years at Invesco Perpetual, but it all went wrong after he struck out on his own, with oversight. Being contrarian is one thing, being arrogant is quite different.

Plenty of ordinary investors make the same mistake. They overrate their abilities and race around buying up stocks they reckon will trash the market.

At the Fool, we advise building a balanced portfolio of mostly FTSE 100 shares to deliver steady income and growth for the longer run. You don’t need to be a stockpicking genius to do that. In fact, a bit of humility helps.

Buffett has humility. Woodford didn’t.