“…the more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be. I don’t know anyone who did it with great rapidity. Warren Buffett (Trades, Portfolio) has become one hell of a lot better investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge we had, the record would have been much worse than it is. So the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.” - Charlie Munger (Trades, Portfolio)
I read a great article by John Mihaljevic, author of The Manual of Ideas, who constantly interviews some of the greatest investors of our time. The article is called “The Biggest Investment Mistakes – in the Words of Jean-Marie Eveillard (Trades, Portfolio), Howard Marks (Trades, Portfolio), et al.” You can read it here.
The article has nearly 30 confessions from different investors regarding their worst investment mistakes. Here are some of the most interesting ones (although I highly recommend reading the whole article). Let’s jump right in to follow Munger’s advice:
- Howard Marks (Trades, Portfolio) co-Chairman of Oaktree Capital Management: “I think that the great accomplishment in investing is not making a lot of money, but is making a lot of money with less-than-commensurate risk. So you have to understand risk and be very conscious of it and control it and know it when you see it. The people that I think are great investors are really characterized by exceptionally low levels of loss and infrequency of bad years.”
Seth Klarman (Trades, Portfolio) also mentioned “Make sure the downside is protected and then the upside will take care of itself.” I am sure that if we ask around the investing community the common goal would be to make money. However, most value investors look for capital preservation first, and they do so through their allocation strategies, which is different from aiming for the fences in every investment while losing sight of the risks we may undertake.
- Jean-Marie Eveillard (Trades, Portfolio), senior adviser to First Eagle Funds: “The single biggest mistake is not being value investors. Admittedly, it’s difficult not to pay attention to—everybody has a Bloomberg machine or something—not to pay attention to daily changes in stock prices.”
Cash flows and earnings are the main drivers of value for businesses. Why then, do we focus so much in market gyrations? Much of this is temperament as Charlie Munger (Trades, Portfolio) says.
- Larry Sarbit, chief investment officer of Sarbit Advisory Services: “Investors allow emotion take over their investment decisions. That is undoubtedly the biggest problem. They don’t think very much at all. There’s not a lot of thought going on and so therefore don’t be surprised if things don’t work out well. They’re their own worst enemy.”
Warren Buffett (Trades, Portfolio) mentioned that the numerical part is commonly the easiest part of an investment decision, however, it is our emotions that generally sabotage our execution and success. When greed and fear get inside our heads, rationality takes the back seat.
- Bryan Lawrence, founder of Oakcliff Capital: “The single biggest mistake is not having the right temperament or sufficient balance in their lives, to manage through the humbling experience of the markets.”
- Brian Boyle, chief investment officer of Boyle Capital: “The biggest mistake I see is overconfidence. The markets have a way of taking care of that though. This can be a very humbling business and it is important to remember that.”
- Lisa Rapuano, portfolio manager of Lane Five Capital Management: “The single biggest mistake is being human? Seriously. The most important thing to do is to understand your own temperament and skills, to develop a plan and to stick with it. It takes a lot of work to remove yourself from all the noise and the pressure and you still make mistakes. On the other hand, this is what makes our business so wonderful: you can always get better, you can always learn more and it’s never, ever boring.”
The most important lesson from these last three comments is that investing can be indeed a very humbling experience. It is the smart but humbler investors that recognize and learn from these mistakes to become better. So long as I learn from my investing mistakes, I don’t see (most of) it as lost money, but education money.
As Rapuano says, we are drawn into investing because this business is wonderful, always challenging, always evolving. If we pause to think and learn from others, as well as our own mistakes, the journey can only become more enjoyable.
Personally, my worst investment mistake was over-estimating my ability to understand a business and how it made money. Even though the valuation seemed very attractive at the time, the business prospects and management left much to be desired. In summary, I placed too much emphasis in the numbers while forgetting the qualitative aspect of the business. This has led to better decisions but only after recognizing and looking deeply to find where I was wrong.
What have been your biggest investment mistakes?
