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Grahamites
Grahamites
Articles (241) 

There Is Always an Excuse

It is easy to find justification for investment failures, but we should cultivate a habit of not doing so

June 13, 2017

I read a few letters today; a few by Warren Buffett (Trades, Portfolio) and a few by a number of renowned value investors. In Buffett’s letters, I noticed a few times he candidly admitted he had made mistakes and analyzed why. In the other guru’s letters, I noticed plenty of excuses for underperformance and no attribution to themselves.

It suddenly dawned on me that one of the most admirable yet most underappreciated qualities of Buffett and Charlie Munger (Trades, Portfolio) is they never seek excuses for their failures. In fact, it almost seems like they intentionally make every effort to trumpet them.

It is very easy to fool yourself, but it is even easier to find an excuse for underperformance in investing. Let’s review a few common ones:

1. We underperformed because we hold a large percentage of our portfolio in cash. If you look at our equity-only portfolio, we are beating the markets. (Is cash not an investment class then?)

2. We underperformed because we bought low price-earnings (P/E), low price-book (P/B), cheap stocks and the other market participants were buying growth stocks. In other words, traditional value is out of favor. (Does value equal to low multiple?)

3. We underperformed because we underweighed the sectors that contributed the most to the index return, and those sectors were too expensive. On the other hand, we overweighed the sectors that declined because they were cheap and are even cheaper now.

4. We underperformed because we stick to our discipline and only buy when the stocks trade below our “conservatively estimated” intrinsic value. It is an expensive market out there.

5. We underperformed because we were unlucky on a few large investments. Without those large detractors, we would have outperformed.

6. We were not wrong, just too early.

7. We had some big winners but should have sold them instead of holding onto them.

8. We sold the winners too soon and held the losers too long.

9. We were right with most of our stocks, but we underallocated the big winners and overallocated the losers. Had we operated on an equal-weight basis, we would have outperformed.

10. It is OK to have disastrous years because, historically, we have come back strongly following bad performance.

11. I did not underperform. My partner did and he has left. Or the portfolio managers we hired underperformed and they were fired.

I am not saying all the excuses above are bad ones. In fact, some of the above excuses can be legitimate. But the moment you start finding excuses, you are lowering your standard and blurring the boundary between truth and fooling yourself. Excuses are often disguised denials when the reality is too tough to face. Excuses temporarily alleviate the pain. Unfortunately, in life, and especially in investing, it is much easier to look for an excuse than to face the truth. Money managers have every incentive to find excuses in order to keep clients from leaving.

When I was in high school, I read a book about West Point Military Academy. I do not know whether this is still true or not, but I read that cadets at West Point are trained to universally answer any question with one of four responses:

  • Yes, sir.
  • No, sir.
  • No excuse, sir.
  • Sir, I do not understand.

Four responses, that is all. The purpose of drilling into your brain the simplicity of only four responses is to eliminate the desire to make an excuse or in-depth explanation when the bottom line is sufficient.

In investing, perhaps we can adopt similar simplicity and stop finding excuses.


Rating: 5.0/5 (11 votes)

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Comments

Thomas Macpherson
Thomas Macpherson premium member - 5 months ago

Thanks Grahamites. I try to be open about my investment mistakes (and boy are they numerous), but you have to have a certain amount of confidence in yourself and your process to be that way. As a professional money manager, I think it is much more difficult to openly trumpet your failures. Nobody likes underperformance - least of all your investors - and they are less likely to respond well to an "aw shucks" description that cost them investment returns. I wrote once that if an investment manager can't be honest to his/her investors, it won't be long before he begins fooling him/herself. I stick by that view. Thanks again for a great article. - Tom

fung9815
Fung9815 - 5 months ago    Report SPAM
In the recent CNBC interview:



Becky Quick: How come you don't buy shares of Amazon?

Warren Buffett (Trades, Portfolio): Stupidity.



If most investment managers and investors have the humility like Warren, capitalism would be a much better world.

Grahamites
Grahamites premium member - 5 months ago

Tom - Absolutley agree we need to balance humility and confidence. It is absolutely more difficult to trumpet your failures as investment professionals, especially to the less informed clients. Having the right process and having the right clients help tremendously in that aspect. Thanks for great insights.

Grahamites
Grahamites premium member - 5 months ago

Fung9815 - Well said. I have nothing to add:)

vgm
Vgm - 5 months ago    Report SPAM

Thanks Grahamites. A very important aspect of investing. If we fail to learn the apposite lesson from a mistake, we'll not progress. I think this is one area where Buffett and Munger excell - they are self confessed lifelong learners.

The Nobel prize-winning physicist Richard Feynman once stated: "The first principle is that you must not fool yourself – and you are the easiest person to fool."

Grahamites
Grahamites premium member - 5 months ago

Vgm - Great quote from Feynman.

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