Charlie Munger's Thoughts on Mistakes and What We Can Learn From Them

Reviewing mistakes is a key component of investment success

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Rupert Hargreaves
Apr 15, 2021
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One of the certainties of investing is the fact that we will all make mistakes. Any investor who says they have not made a mistake has either not been investing long enough or is lying.

Mistakes are an inevitable part of the process. They cannot be avoided. All we can do is try and limit the financial fallout of any mistake and learn from the error. A rational approach to analyzing mistakes and understanding what went wrong is vital for investors who want to grow and develop.

This is something

Charlie Munger (Trades, Portfolio) has spoken about multiple times over his life. These comments from the billionaire were noted in the book "Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger," a collection of speeches and talks by Munger that were compiled by Peter D. Kaufman:

"I don't want you to think we have any way of learning or behaving so you won't make mistakes. I'm just saying that you can learn to make fewer mistakes than other people and how to fix mistakes faster when you do make them

But there's no way you can live any adequate life without making many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke."

In 2011 at the final annual meeting of Wesco Financial, Munger further explained:

"I like people admitting they were complete stupid horses' asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn."

In an interview with Morningstar, he also stated:

"Forgetting your mistakes is a terrible error if you are trying to improve your cognition. Reality doesn't remind you. Why not celebrate stupidities in both categories?"

Understanding that we need to analyze and dissect our mistakes is one thing, but actually doing this is something else altogether.

Every investor should develop their own process for analyzing mistakes as we can only really follow through with something we are entirely comfortable with. However, I have developed a couple of strategies of my own over the years to help with this process.

Finding errors

The easiest and most straightforward way to analyze mistakes, in my experience, is to keep a trading diary.

I have a list of all the investments I have bought and sold over the past ten years. Around once a year, I go and look at all these mistakes to see if I can understand why I made them and if there's anything I had learned in the past 12 months that would help me improve my understanding of the situation.

The decision to keep a trading diary was inspired by Munger's advice on how to remove psychological biases. The billionaire has stated in the past that one of the best ways to avoid psychological biases is to be aware of them in the first place. Therefore, by having a list of successful and unsuccessful trades in front of me, I'm able to become aware of what has worked and what has not. From there, it's a simple step to go back and conduct a more detailed analysis.

Of course, losing money is not the only mistake investors can make. Mistakes of omission just as important. This is a little harder to analyze because there's no record of what I might have bought, unlike real-world trades.

That's why whenever I look at a business, I try to take notes. The notes contain my analysis of what I liked about the company at the time, my valuation and my final decision. If I buy a holding, I update the notes annually. By having these records, every so often, I can go back and look at companies I didn't buy and see if my analysis was correct.

This exact strategy may not work for everyone, but I think that for me, it does what it's designed to - helping me think about mistakes and successes rationally and analytically.

Disclosure: The author owns no share mentioned.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.