Mistakes will be made. It’s a normal part of investing. The question is what will you do when you make one and how bad will the outcome be?
Big mistakes are the issue.
An extreme example is you bet all your savings on a single stock — a tip you got from a friend. It has some early success only to tumble 30%. And this is where biases creep in to deter the best decision possible.
You’re maybe too confident things will turn around. Everyone says, “it’s due for a bounce.” All you want is to recover your losses.
So you hold on. Except, it falls further — 50%, then 70%. Finally, you give in and sell at a 90% loss.
With 10% of what you started with, you’re stuck with the incredible task of rebuilding it back up. Of course, blindly following a stock tip or betting it all on a “sure thing” are only two of a countless number of ways to part with your money.
And the math is clear. The bigger the loss, the bigger the gain needed to break even. In fact, as a loss worsens, the return just to break even rises exponentially.
So that 90% loss means you need a 900% gain to get back to even. If you earned a 9% return per year on the money you have left, it’ll take over 25 years to get there! That’s a costly, memorable lesson (assuming the correct lesson is learned).
Investing is about avoiding having to start from scratch. As Peter Bernstein said, “the trick is to survive.”
Being wrong is inevitable in an activity involving an uncertain future. Investing is about planning for and minimizing the impact of mistakes in advance.
The best investors understand survival well. While many investors chase after the greatest returns possible, something that often produces the opposite, the best investors have learned that avoiding the worst errors improves performance.
The greats are not perfect. They still make mistakes but their worst mistakes tend to hurt their overall portfolio much less than that of the average investor. In fact, years of experience have practically built it into their process.
They accept the inevitability of being wrong, analyze their mistakes, learn what they can, and move forward. They’re, also, humble enough to share and give others a chance to learn from it.
On Accepting Mistakes
I have never interviewed a money manager who told you he’d never made a mistake, and a lot of them do, who didn’t stink. Every great money manager I’ve ever met, all they want to talk about is their mistakes. There’s a great humility there. – Stan Druckenmiller
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I’m constantly making mistakes where I can, in retrospect, realize that I should have decided differently. And I think that that is inevitable because it’s difficult to be a good investor. — Charlie Munger
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As a scientific, we’re trained not to judge, but to gather facts. And judgment is a big part of the stock investing process. Also, we’re trained to be very precise and right. But investing is about being imprecise and also accepting that you will be wrong 30%, 35%, 40% of the time, and that’s a good ratio. — Francois Rochon
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I have made bad business decisions. You can’t live a successful life without doing some difficult things that go wrong. That’s just the nature of the game. And you wouldn’t be sufficiently courageous if you tried to avoid every single reverse. — Charlie Munger
On Handling Mistakes
I’ve made a lot of mistakes. One of my life principles is that the only way you can live life is by dealing with what is, and not with what might have been. So that’s the way I’ve tried to deal with setbacks. I’m a rather thick-skinned guy, and I don’t lie awake at night worrying about my mistakes—never have, never will. — John Bogle
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I’ve thought a lot of things when I’m managing money with great, great conviction, and a lot of times I’m wrong. And when you’re betting the ranch and the circumstances change, you have to change, and that’s how I’ve always managed money. — Stan Druckenmiller
On Common Mistakes
There are two principal mistakes that nearly all amateurs in the stock market make. The first is to have an inexact knowledge of the securities in which one is dealing, to know too little about a company’s management, its earnings, and prospects for future growth. The second mistake is to trade beyond one’s financial resources, to try to run up a fortune on a shoestring. — Bernard Baruch
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Our bias toward buying and holding has at times made us too quick to rationalize a problem that hits one of our companies as temporary and “already priced into the stock.” If the problem turns out to be more long-term and fundamental, it’s likely not fully discounted into the current price at all. We’ve been blind at times to fundamental changes in a company’s business because we think the quick 25-30% drop in the share price makes the stock too cheap to sell. — Francois Rochon
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We investors make many mistakes when we make our investing decisions: we tend to buy high and sell low and we go for the mutual funds with the best two- or three-year record. The fact that past performance has no predictive power never occurs to us. It looks like a winning proposition. We also get out of a fund that happens to have had two or three years of inferior results. — Charley Ellis
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One of the biggest mistakes investors make is to look at the last few years and assume that’s the new norm. If recent years have been volatile and unrewarding, that’s what people generally expect the next few years to be like as well. — Francois Rochon
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If I’ve made one mistake in the course of managing investments it was selling really good companies too soon. Because generally, if you’ve made good investments, they will last for a long time. — Lou Simpson
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There is something about “inside” information which seems to paralyze a man’s reasoning powers. For one thing, people place a great store on knowing something no one else knows, even if it isn’t true. This feeling of possessing “inside dope” makes a man feel so much smarter than other people that he will disregard even the most evident facts. I have seen insiders hold on to their stocks when it was obvious to nearly everyone else that they should be sold. — Bernard Baruch
On Biggest Mistakes
The worst thing that you can do is get on a winning streak, unless you have tremendous discipline, which I did not used to have at all. You think that you have finally “figured it out.” You think that the game is now easy, and you start betting more and more. Of course, you know what happens next. You have to know yourself and your bad habits. One of the things that I used to do when doing well was to cut back on my homework. I would start to feel that “I just know this stuff.” The moment that you stop doing the work, you’re about to start a bad losing streak. — Steven Crist
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When stocks go down we’re sometimes stupid enough to buy more. That’s what we’ve always done. We do not listen to the marketplace. The only thing worse than being wrong is being whipsawed — you know, caving in at exactly the wrong moment and duplicating on the other side the losses you just suffered. — John Neff
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Cable and Wireless would have to be the investment where I had my head handed to me. To paint the picture, the dot-com bubble was over and the share price was plummeting… My history has always been in buying securities when they’re unpopular. However, Cable and Wireless is an illustration of the fact that despite careful analysis and a strict adherence to Benjamin Graham’s value principles — a low share price, no debt, a huge amount of cash and profitable established networks — things can still go wrong, spectacularly so. — Peter Cundill
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My biggest investment mistake was not buying enough of the ones that were really good. And, that’s looking at it from kind of a different way. — Chuck Akre
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Even though they don’t show up on our statements, errors from not buying something are often much more costly than errors on something we bought. Maybe an error of commission results in a stock that’s down 20-30%. Most of the errors of omission I cite are cases where I didn’t pull the trigger and missed a 400-500% run or even more. — Francois Rochon
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My experience teaches me that by far the largest losses have been sustained by investors through buying securities of inferior quality under favorable general conditions. These prove to be “fair-weather investments” only, and at the first breath of adversity their prices tend to collapse. (It is then that the disgusted holder sells them out — often at ridiculously low figures — to shrewd and sophisticated operators.) Next to this, as a source of loss, is the purchase of really good common stocks at the inflated values engendered in the upper reaches of a bull market. — Benjamin Graham
On Analyzing Mistakes
When you look at your mistakes, you want to be very objective and say, well, this is a mistake for those reasons. But some stocks that I didn’t purchase that went up 100 times, but I really didn’t understand, that’s not really a mistake. It’s just that you decided that this was outside your circle of competence and you missed it. But that’s not really a mistake.
It’s a mistake when it was in your circle of competence and for some reason you didn’t go through with the purchase. Or it’s a mistake when you thought that the company was in your circle of competence, and in the end, it was not. — Francois Rochon
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I developed a habit I was never to forsake — of analyzing my losses to determine where I had made my mistakes. This was a practice I was to develop ever more systematically as my operations grew in size. After each major undertaking — and particularly when things had turned sour — I would shake loose from Wall Street and go off to some quiet place where I could review what I had done and determine wherein I had gone wrong. At such times I never sought to excuse myself, but was concerned solely with guarding against a repetition of the same error. — Bernard Baruch
Last Call
- Stories > Statistics – Klement on Investing
- Risk and Regret – M. Housel
- One Trick Ponies – Young Money
- Gurus Gone Wild – This is the Top
- We Measure What We Can – Verdad
- How Much Portfolio Insurance Do You Need? – J. Rekanthaler
- Learning from Sun Tire’s Dick Erickson – Investment Masters Class
- The Cup of Coffee Theory of AI – Every
- We Know Where the Next Big Earthquake Will Happen, But Not When – Vox
