Mistakes are the bane of investor performance. Naturally, the idea that avoiding errors improves performance is simple enough but our behavior often gets in the way.
There’s a reason why some of the best investors ever are often the most humble. Pride is an obstacle investors need to overcome before improvement happens.
The fact is humans are fallible. Mistakes are inevitable. The great ones accept it, are critical of their own when needed, learn what they can, and move forward.
With pride out the way, finding the recurring mistakes should be easier, right? But again, another obstacle called time gets in the way. Rarely is the same mistake made one decision after another until it’s recognized and removed. And investment decisions are rarely made in rapid succession either.
There’s the old adage that bull and bear markets are just far enough apart that investors forget how the last one ended. Well, similar mistakes have a distance between them too. It makes it difficult to remember the last time the mistake was made. Which can lead to repetition.
To counter that distance, a record is needed. Keeping an investment journal to track decisions is a great place to start.
Then the humbling work can begin getting reacquainted with yourself. Byron Wien, in a piece written in 1986, shared how that process went for him.
He researched investment decisions he made throughout his career to see if there were any patterns of mistakes. Of course, he found a few:
Selling too early. All of us do this once in a while. I tend to fall into the trap in attempting to fine tune the portfolio. Last year, I thought the drug, food, and media groups were overextended and it made sense to cut back somewhat. I had concluded that the economy was weak and therefore continued to be bullish on disinflation stocks generally, and these stable growers were the leaders of that concept. So here was a case where what I thought was profit-taking prudence was in conflict with my core investment concept. It is true that you never lose money taking a profit, but you can lose precious performance points. Make sure you’re not making a change to look busy.
The turnaround with the heart of gold. For years I have been a sucker for laggard groups and stocks that have an outside chance of making it big. Many of us have a contrarian streak in us that results from the conviction that in America good things happen to the frail. When I was a child, I often dreamed of hitting home runs after being the last picked for a softball game. I was frequently the last picked but hit few homers. Why can’t I remember how hard it is to turn around a major company in the competitive international business environment that exists today?
Overstaying a winner. I have had a lot of good stock ideas in my career or, more accurately, I have recognized quite a few solid opportunities when analysts have shown them to me. I have also held more than a few round-trip tickets on some very good stocks, because I have assumed that what has treated me well in the past would continue to do so in the future. More often than not, this happens because I become complacent about my knowledge of the fundamentals. Sometimes portfolio managers become so thirsty for new ideas that they don’t properly maintain their knowledge of the developments taking place in the companies they have held for a long time.
Underestimating the seriousness of a problem. As Dennis Sherva has said about emerging growth stocks, “The first bad quarter is rarely the last.” More often than not, it seems, the right response to a negative surprise is to sell and keep an eye on the situation from the sidelines. We can all come up with exceptions like Digital Equipment, which snapped back after the troubling September 1983 quarter, but, with smaller companies, a disappointment usually results from a set of conditions that will take time to repair and other stockholders may not have your patience. Sometimes the first day’s plunge after a negative announcement is followed by a brief recovery, but if you’re going to stay around for things to really improve, you’d better have plenty of other good stocks and very tolerant clients.
Wien’s goal in revisiting his misadventures was three-fold. He obviously wanted to improve his own performance. And sharing his mistakes allowed others to learn from them too.
But he hoped to encourage others to repeat the process on themselves. The thought was that if he can find recurring errors in his own decisions, it’s likely others can too.
If Freud Were a Portfolio Manager
- Investing: The Greatest Show On Earth – M. Housel
- How Lucky are You? – The Better Letter
- On Inflation – Verdad
- William J. Bernstein on Crowd Behavior (podcast) – Masters in Business
- Value Investing Masterclass: Joel Greenblatt & Rich Pzena on Active Management (video) – Pzena
- NFTs are a Dangerous Trap – S. Godin
- The Usefulness of Our Delusions – Behavioral Scientist
- Interview: Patrick Collison, co-founder and CEO of Stripe – Noahpinion
- Write Simply – P. Graham