Superior Investing (AND LIFE) is All About Making Mistakes
I talk about making mistakes a lot here. Probably because I’ve made a lot of mistakes throughout the course of my life and my career. A big part of growing and learning is about falling down, getting back up and pushing forward only so you can fall down and get back up again. It’s important that you try not to fall down, but it’s equally important that you understand why you fell down so you can get back up and push forward understanding your past mistakes. This is how we evolve and improve. So I was glad to see the latest from Howard Marks covering this topic more thoroughly than I will here:
“Mistakes are a frequent topic of discussion in our world. It’s not unusual to see investors criticized for errors that resulted in poor performance. But rarely do we hear about mistakes as an indispensible component of the investment process. I’m writing now to point out that mistakes are all that superior investing is about. In short, in order for one side of a transaction to turn out to be a major success, the other side has to have been a big mistake.
There’s an old saying in poker that there’s a “fish” (a sucker, or an unskilled player who’s likely to lose) in every game, and if you’ve played for an hour without having figured out who the fish is, then it’s you. Likewise, in every investment transaction you’re part of, it’s likely that someone’s making a mistake. The key to success is to not have it be you.
Usually a buyer buys an asset because he thinks it’s worth more than the price he’s paying. But the seller sells the asset because he thinks the price he’s getting exceeds its value. It’s pretty safe to say one of them has to be wrong. Strictly speaking, that doesn’t have to be true, thanks to differences in things like tax status, timeframe and investors’ circumstances. But in general, win/win transactions are much less common than win/lose transactions. When the dust has settled after most trades, the buyer and seller are unlikely to be equally happy.
I consider it highly desirable to focus on the topic of investing mistakes. First, it serves as a reminder that the potential for error is ever-present, and thus of the importance of mistake minimization as a key goal. Second, if one side of every transaction is wrong, we have to ponder why we should think it’s not us. Third, then, it causes us to consider how to minimize the probability of being the one making the mistake.”
In the world of investing, it’s unusual to find someone who won’t agree with the notion that the best lessons are generally the costliest ones. The same could be said of life. We are in a constant process of learning and a big part of learning is understanding why we are often wrong. When you understand how you can be wrong you then understand how to avoid past mistakes thereby improving your future odds of being right. So it’s important that a mistake not become a regret. A mistake must always turn into a lesson. That’s called progress and in this business we’re ALL always making mistakes. The people who make progress are the ones who learn from their mistakes (as opposed to claiming they never make mistakes).
I often embrace being wrong even though it’s something I try to avoid. The thing is, it’s guaranteed to happen in this business. Investors are in the business of learning to be wrong so they can learn to be right. No one enters this world or this business knowing everything. And it’s the people who evolve and learn from their mistakes more quickly than others who stick around in this business.
I’d read the whole Marks letter here. It’s very good.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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13 Comments
It’s unfortunate that you’re in the investment business. You’d have been a great teacher, Cullen.
I guess I do a little bit of teaching here….
I’ve always felt you could easily spot the people who’ve never made any mistakes… because they’d never actually done anything!
Whenever I end up in a deep conversation with a fellow investor, the conversation ALWAYS turns to either, “the one that got away” or “the one that went really really wrong.” Anyone who has ever put their own (or others) money at risk – while making their own choices (and not just by the advice of an advisor or broker) has at least one story like these.
Anyone who says they’ve called their own shots in the market and don’t have any war stories to tell is a plain liar.
Excellent!
life is a game after all. for individual – investing or trading, make sure you have enough cash for basic living, and assume you will lose all your capital. make sure you understand there is NO sure bet. when making a lot money, make sure you donate for those unfortunates.
This is round about explanation for trend following.
Most of your trades will be losers or “mistakes”. You “learn” from them is another way of saying you get stopped out of trade and don’t hold losers.
Cullen,
From Think and Grow Rich:
“Every setback contains the seed of an equal or greater benefit.”
I cannot tell you how many times in my life that this has proven true especially at my darkest moments; inevitably the kernel of my next life’s adventure reveals itself.
If you take no risks, you will suffer no defeats. But if you take no risks, you win no victories.
- Richard M. Nixon
Good stuff. Thx CW!
Cullen,
I am pretty sure I speak for all of us here in saying we greatly appreciate everything you do for us and the community. The mark of a great leader is a willingness to engage in the selfish act of improving the world around them and in this regard I believe you have succeeded to a tremendous extent – I also believe much more is expected of you!
“To whom much is given is much required. [Luke 12:48]”
From that great philosopher Rocky Balboa:
“But it ain’t about how hard you hit; it’s about how hard you can get hit, and keep moving forward. . It’s How much you can take, and keep moving forward. That’s how winning is done.”
That’s very kind of you, but I don’t think I’m playing a leadership role. At best, I’m a guide amongst many excellent climbers.
CR, I have learned a lot from your website. I appreciate your open mind attitude and your fairness. With regard to learning from our mistakes, it is quite obvious to me however I have noticed also that ego often stands in the way of acknowledging and reexamining. Since I already paid the tuition (in losses) why not learn something from the experience. However pride and ego so often stop others from doing the same thing : one cannot learn from mistakes if one never makes any mistake. I really like the quote (from Keynes I believe ): when the facts changed, I changed. What do you do , sir ?
It is our nature as human beings to push our many successes aside, and disproportionately dwell on our failures. Fortunately for us, those who love us do the opposite.
I try and study my past mistakes for individual equity selections. Usually documenting why I bought at the time I did then reviewing those to see how I went wrong. I have a lot of financial/ target prices that just didn’t pan out. I learn something every time by going back in time.