All investors make mistakes. It is unreasonable for anyone to expect to have a perfect track record when it comes to buying and selling shares.
Indeed, the best investors may be those individuals who quickly and effectively learn from their mistakes. This may enable them to gradually become more efficient at apportioning capital.
Therefore, regularly allocating time to analyze your mistakes could be just as important as time spent searching for attractive investment opportunities.
Learning from your mistakes
In an ideal world, it would be possible to analyze the mistakes of other investors so that you avoid them. For example, an investor may assess previous bull markets and determine that a common pitfall among their peers is paying too much for a stock based on unrealistic earnings forecasts.
However, there can be a disconnect between successfully identifying the mistakes of other investors and avoiding them when managing your own portfolio. Indeed, making your own mistakes seems to be a far more effective means of learning – even if it entails a higher cost in the form of investment losses. The short-term pain of loss from your own mistakes seems to leave a deeper and longer-lasting imprint than considering the shortfalls of peers.
Likewise, it can be difficult to learn lessons from investment success. For example, bull markets can mask poor decisions such as purchasing low-quality companies when they trade at high prices. As such, investors may be able to learn more from their actions during bear markets or corrections.
This view was neatly summarised by value investor Mohnish Pabrai (Trades, Portfolio). He has a long track record of outperforming his benchmark. As he once stated:
"Mistakes are the best teachers. One does not learn from success. It is desirable to learn vicariously from other people's failures, but it gets much more firmly seared in when they are your own."
Regular reviews
Allocating time on a regular basis to analyze your mistakes could be a very productive experience. For instance, an investor may review their actions and inactions on a quarterly basis to see how they could have done a better job of allocating capital.
Sometimes, this process may not be particularly enjoyable. However, revisiting the rationale for specific decisions when emotions may be less raw could help an investor to understand why they made poor decisions. This may reduce the chances of them repeating the same errors again in future.
In doing so, it is important not to punish mistakes, or become frustrated. Rather, the process is one of learning that aims to better equip oneself for when similar situations occur in future.
An investing journey
Ultimately, no investor will ever make the right decisions all the time. Even the most successful value investors, such as Mohnish Pabrai (Trades, Portfolio), have experienced disappointing returns from specific investments during their careers. As such, investing is a journey that cannot be perfected.
However, investors who confront their mistakes and use them to improve their decision-making ability may stand a better chance of making optimal decisions in future. Therefore, adding a regular period of self-reflection to your investment process could be a valuable tool in the long run.
Read more here:
- Benjamin Graham on Allocating Capital in an Ideal World
- Walter Schloss: Don't Rush to Sell Winning Stocks
- Joel Greenblatt: Search Unpopular Sectors for Bargain Stocks
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