How should we deal with regrets? How can we come to terms with the opportunities we missed and the ones we didn’t miss but wish we had?
That’s the issue at the core of chapter 15 in “Big Mistakes: The Best Investors and Their Worst Investments.” Throughout the book, author Michael Batnick has tried to help individual investors by identifying the mistakes of the greats, and explaining how we can avoid them.
To set the context, Batnick assures that no one gets it right every time, and no one has ever come close to doing so. In the long history of Homo sapiens' evolution, financial management is a very recent phenomenon, just a blink in time.
And, thousands of generations of hunters and gatherers have given us some instincts that are counterproductive. For example, if we hear something in the bushes behind us, we run. Maybe that noise is coming from a sabre-toothed tiger or maybe it’s just the wind. We don’t have to read Darwin to know those who took every rustle seriously would be the ones who survived and passed on their genes. Batnick added:
“This 'run first, ask questions later' attitude is something that helped us survive in the field, but too many people have been unable to suppress this primal instinct from their investment decisions. This has and will continue to create a wedge between investment returns and investor returns. Running at the first sign of trouble in financial markets is dangerous because it's almost never a saber”toothed tiger and the 'no harm no foul' rules don't apply in financial markets.”
So, if we’re investors, we’re bound to have regrets. Batnick wrote, “You cannot avoid regrets in this game. You'll buy stuff you wish you hadn't and sell things you wish you held onto.”
One great investor who understands that well is Chris Sacca, who founded Lowercase Capital, a venture capital firm that invests in early-stage companies. He has argued his first fund “might have been the most successful in the history of venture capital.” When Batnick’s book was published in 2018, Sacca’s fund was worth 250 times more than what it was when launched.
Batnick wrote, “Sacca became a billionaire in under 10 years and before the age of 40 because he is an expert at spotting unicorns, private companies that have reached the $1 billion valuation mark.” These are some of his “home runs”:
- Instagram (a Facebook (FB, Financial) company)
- Uber (UBER, Financial)
- Kickstarter
- Slack (WORK, Financial)
- Automattic (parent of WordPress)
- Twilio (TWLO, Financial)
- Twitter (TWTR, Financial)
And these are some of the companies that he regretted not investing in:
Sacca told an interviewer that, “One of my constant recurring nightmares is about the stuff I passed on.”
Batnick added:
“Sacca is able to speak openly and candidly about his misses because he's had so many winners. He understands that swinging and missing, or in these cases watching the pitch and not swinging is part of the game. For us mere mortals however, passing on the next Amazon, or selling it too early can have disastrous and long”lasting effects, because for us, these opportunities don't come around too often.”
When we do get those opportunities, how do we know if or when we should get out? After all, we don’t know in advance if we’re buying an Amazon (AMZN, Financial) or an Enron.
According to Batnick, the best way to minimize future regret when you have big gains or losses is to sell some—but not all—of the security. As he noted, there is no correct amount to buy or sell, but any amount could help. So, for example, if you’re not sure to do with a stock, sell 20% or 50% or whatever portion makes future gains or losses less regrettable. He wrote, “Minimize regret and you'll maximize the chances of you being a successful investor over the long term.”
In the final chapter of the book, Batnick reflected on his own mistakes and regrets. He talked about unforced errors and reported that he had made literally thousands of them. For example, with a relatively small portfolio in 2012, he spent $12,000 in trading commissions.
His biggest mistake, he said, was not giving education the respect it deserved. He managed to “get by” in high school and college, at least when he attended school. To cap off a mediocre education, he graduated from college in 2008, just as the economy went south.
Batnick thought he was getting off to a good start when he got a job at a financial planning company—only to find it was a job selling insurance by cold calling potential clients. All the while he continued to invest what he could, in one case trying unsuccessfully to trade 3 times levered exchange-traded funds. Soon after that, he began high-frequency trading in hopes of not losing.
After several more frustrating false starts, he accidently made contact with Josh Brown of Ritholtz Wealth Management and finally got a good job at a promising firm. At the time he joined the firm, it had two principals, an assistant and about $50 million under management; when he wrote the book in 2018, the firm had increased its assets to $700 million and employed 20 people. Batnick has become the firm’s lead on internal research and a member of the investment committee.
And what has he learned from his mistakes? First, to cut his losses short, not taking any hit greater than 1% of his trading account. Second, if you have some financial event coming up in the next few months or years (in his case, it was a wedding), don’t invest at all. He concluded by writing:
“I've made plenty of mistakes in investing and in life, and I'm fine with that. A perfect history in either endeavor has never been achieved. The next time you take a big loss or sell too early or try to get back to even, remember, we've all been there. The difference between normal people and the best investors is that the great ones learn and grow from their mistakes, while normal people are set back by them.”
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.
Read more here:
- Big Mistakes: Charlie Munger
- Big Mistakes: John Paulson
- Big Mistakes: John Maynard Keynes, the Investor
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