I recently read an article posted on Gurufocus by Dr. Paul Price entitled, “Beware of Rear View Mirror Analysis” with a subtitle, “Everything Looks Clearer in the Rear View Mirror”. It was a great article basically acknowledging that hindsight truly is 20-20. (Many thanks for his impressive articles!) He gives a great example on how the media can always scoop a story after the fact and summarizes how easy it if for us to be insightful when you are looking backwards. My one exception to the article is when it is stated that “you can never be wrong about the past”. The context of this within the article is noted, but one should realize that it is still possible to be wrong about the past.
While not stated, one would surmise that he has nothing against examining our past investment ideas or analysis and how they played out, hoping to learn from both mistakes and successes. The point is, Wall Street can analyze quite well after the fact, but investors must seek a much clearer finding of facts in examining their investing successes or failures as they look into the mirror. Looking into mirrors can be a useful experience, but it does depend on when and which mirror you choose to look at.
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“In the business world, the rearview mirror is always clearer than the windshield”.
In the faith of my family, it was traditional or customary, upon the death of an immediate family member, to enter into a seven day mourning period during which all mirrors were to be covered up in an endeavor to get one to focus….not on yourself, but to center your attention on the one that is missing and to fully mourn the loss. In relation to our individual investment analysis this can be a good practice. After dismal results on an investment in which so much effort and time were spent in the decision, I’ve often thought it best to cover up the mirror and allow for a complete mourning before removal of the cloth before analysis of the investment takes place. Sometimes, it just takes time to complete a full and honest analysis when you have the ability to really see.
“I busted a mirror and got seven years bad luck, but my lawyer thinks he can get me five”.
Oddly enough, many societies have a similar habit of covering the mirror. One might even be reminded of the Bram Stoker’s famous story, noting that the vampire removed all of the mirrors in the castle. This leaves him alone without the ability to see his reflection. Investors would do well to remove the cloth when they are ready to examine their experience, but by leaving a cloth up, there is nothing to reflect on.
The truth is that there are many types of mirrors and it’s important to know which we are looking into when it comes to analyzing investment choices of the past. After all, the local carnival is fond of placing mirrors that distort the real you when standing in front. Sometimes you look skinny, sometimes fat, but the mirror is distorting the true picture. So what type of mirror do you look into to analyze your investment skills and is it giving you a distorted view?
As Warren Buffett (Trades, Portfolio) reminds us that the rearview mirror gives us a clearer picture than a windshield, note that staring into a rearview mirror too long does not allow you to see what is ahead of you. So while trying to determine what happened, you can possibly spend too much time and never fully get the correct answer. Sometimes, Mr. Market just decides to ignore your analysis. As clear as a picture as you might get, it is always important to remember that rearview mirrors still have their blind spots, meaning that you still may not see or perceive all that is behind you. This means it requires us to get out of our comfort zone and look away from the mirror and physically turnaround to perceive what is there. It is no different in our analysis of our investment skills. Looking back includes not just looking into a rearview mirror for a quick glance; it includes getting uncomfortable and really taking the time to look. It requires more than a glance, it requires real work.
While concentrating on rearview mirrors, we often forget that the automobile is provided with two side mirrors. These are still fraught with danger, because blind spots still exist. What is interesting is that the two mirrors on each side of the vehicle are different from one another.
The mirror on the passenger side has an etching into the glass which notes that “objects in mirror are closer than they appear”. This mirror is convex or spherical making objects appear smaller than they actually are. It’s the same concept of looking at the back of a typical spoon. But the warning is placed on the mirror so that you understand that the object is probably closer than you perceive. This often causes drivers to misjudge the distance of the vehicle and causes them to take on risk that they do not truly understand. Looking into a side mirror gives you a distorted view, therefore; once again, the rearview mirror appears to be a better example of self examination when it comes to our investments.
The mirror on the driver’s side does not carry the same warning because that mirror is a planar style mirror and gives a more accurate picture of what the dangers are next to you. But it too, has blind spots.
Ultimately, looking back at your past investments regardless of success or failure is a good practice. It should be recognized that looking back is just as difficult as looking forward….perhaps more so. You endeavor to analyze a stock to make the wisest decision you can, but when you look back at the results, it depends on how you look at it and which mirror you choose.
No matter which, recognize that each endeavor to look back has just as many problems as making the original investment decision. Sometimes you may still have some blind spots. Perhaps this is what we need to discover. But each mirror may give off a distorted picture and it’s critical that you recognize that a backward analysis is also fraught with just as many dangers as the original. That should not prevent us from boldly performing the task as long as the risk is fully comprehended.