Every investor makes mistakes. If someone tells you they do not, they are either lying or too inexperienced.
Mistakes are a natural part of investing. Even Warren Buffett (Trades, Portfolio), who is widely considered the world’s most knowledgeable investor, has made some serious errors in his career. In fact, Buffett has said acquiring Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) was his biggest mistake, and look how that turned out.
Unless you can see into the future, mistakes will happen since no one can be 100% sure of what the future holds. The only thing you can control is how much you lose if an investment moves against you, which is why diversification is always encouraged.
Even though mistakes can be costly, I believe they are more valuable than profits. If you book a profit, then great you succeeded. But if you take a loss, most investors will look at the damage and try and question what they did wrong or right. Conducting a similar analysis for a winning position is difficult.
Based on my belief that you can learn more from mistakes than anything else, as part of my value investor interview series over at ValueWalk for some time now, I have been asking every investor interviewed to describe the biggest mistake of their career and what they learned from it.
In this article, I have rounded up some of the best responses. Hopefully you will be able to take something away from the guidance below.
Steven Kiel of Arquitos Capital
"Probably the biggest mistake since the launch of the partnership was JC Penney (JCP, Financial) during the Bill Ackman (Trades, Portfolio) hype. JC Penney was a company that I traditionally would not have had an interest, but I was drawn in by Ron Johnson. There were too many uncertain variables involved in that situation without even considering that retail is inherently unpredictable.
From a different perspective, it was also a mistake to trim my ALJ Regional Holdings (ALJJ, Financial) position as it ran up. Good companies with solid, entrepreneurial management repeatedly find ways to create value. ALJJ is still a large holding, but our returns would be higher if I would not have sold off some of our holdings."
Scott Miller of Greenhaven Road Capital
"This is a humbling passion, so there have been many mistakes…On the individual stock basis – I got burned by Pinnacle Airlines, which went bankrupt and was a permanent loss of capital. I underestimated two factors with Pinnacle Airlines. The first is the board and management barely owned any stock. A decision to go into bankruptcy kept the company in the community and kept jobs that were seemingly a large motivation for the board and senior management (rightfully so) but I really don’t think they did everything they could to protect the ordinary shareholders like Greenhaven Road. One of the first things I do in researching any company now is to look at the insider ownership.
Pinnacle Airlines also had a customer concentration issue that I underestimated. They were beholden to one major airline that provided something like 85% of revenue. It was not a healthy supplier relationship. Given the weakness of their balance sheet when their customer wanted to renegotiate their 10-year contract and made a series of threats – the company was in a weak negotiating position. I will make different mistakes going forward, but I definitely have a greater appreciation for insider ownership and customer concentration than I did before."
Zeke Ashton (Trades, Portfolio), portfolio manager and founder of Centaur Capital Partners
"I’ve come to believe that learning to master the art of investing really boils down to finding a game that you can win, and then playing that game really well. I’ve come across all kinds of investors in my career, and all of the successful ones learn to differentiate the ideas that they can handle where they have some sort of system or approach that really works for them from ideas that they can’t handle or where they really aren’t any better at than the market at large. Value investing as a philosophy is actually a very broad framework, and there is a lot of room for many different styles, but starting with the idea that you are looking to buy underpriced securities is a pretty good place to start. Once you’ve mastered the basics, it is about developing a process that protects you from your own specific weaknesses and allows you to play to your strengths."
Jeroen Bos
"There have been many. I think one of the greatest things I’ve learned is to pay attention to debt...balance sheet full of debt brings a lot of pain and tears down the road. So that’s something to be extremely careful of."
Wally Weitz (Trades, Portfolio)
"Well, I’ve made plenty. Some of them are embarrassing, and some have been costly in dollar terms. But I think one of worst, something that unfolded over many years, 15 or 20 years, that I only came to realize later, was that I’ve been an owner of mortgage banks, thrifts, S&Ls, off and on for 30 years plus and have made a lot of money trading these. They tend to fall sharply when the Fed is raising interest rates, then jump sharply when the Fed stops. I got very comfortable buying at five times earnings and selling back when they rose to 10 [times earnings]. What I found out about the 2007 to 2009 mortgage crisis was that for the past several decades, these banks and thrifts had really used too much leverage, they had poor underwriting criteria; but they got away with it because the price of homes always rose. That didn’t work in the latest mortgage crisis because the losses completely swamped the portfolios of these banks; they couldn’t just flip the houses back out of their foreclosure pool and make up for it. I came to realize that my seemingly good ideas during the 70s, 80s and 90s were just really bad ideas that we got away with. We learned that the hard way in 2007 and 2008…..I get together with a group of old-timers — whose names you’d know — and we get together and swap ideas once a year. And I tried to get a conversation going one night among these guys. I said, 'Looking back, you all have good records for the past 20 or 30 years. How much of that record was built on bad ideas that you got away with?' And I couldn’t get anyone to talk about it! [Laughs]. But for me it was the financials. We gave some money back in 2007 and 2008, but overall we came out on top — it’s sort of sobering to think that what you thought was your own great investment ability was really a mistake that you got away with for a long time."
Disclosure: The author owns shares in ALJ Regional Holdings Inc. (ALJJ, Financial).
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