Buffett and Munger has always said that its important to always be learning. And as much as possible, learn from other people’s mistakes. What other way to learn than to see how the great investors of our time made their mistakes and learn from them?
I recently read the book “Big Mistakes: The Best Investors and Their Worst Investments“, and it opened my eyes to the mistakes that these god-like figures of investing made. It makes you remember that these people are just as human as you are, they all make mistakes. The only thing that separates them from mere mortals is that, they learn from their mistakes, they adjust and make another mistake. So here is their biggest mistakes and the lessons I got from them.
“Good book to have nearby. Read it after you made an investing blunder. It will make you feel good knowing that even great investors make pretty big and dumb mistakes.”Value Investing Philippines
Top 10 Biggest Mistakes of the Great Investors
1. Leverage made Livermore his fortune, leverage destroyed him. He knew everything one can possibly know about market psychology and price action but it seems he never learned how to control risk – it was a constant all or nothing betting for him. No wonder he went broke 4 times, and ended his life. Livermore was a great speculator and the patron saint of traders. But the way he trades was not something to emulate. He was addicted to leverage and overconfident with his gut feeling. He also doesn’t follow his own rules… But the thing about psychology is worth learning from him.
2. Ben Graham understood that no approach works all the time. There are time and place for everything. Markets evolve and some concepts stop working. A margin of safety doesn’t matter during periods of forced liquidation, especially when you are leveraged to the hill. Graham’s greatest mistake was being over leveraged just right before the market crashed in 1929.
3. “A high IQ guarantees you nothing! This is one of the hardest things for newer investors to come to grips with, that markets don’t compensate you just for being smart.” and “Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.” You invest together with other people and those people aren’t your friends. If you only think of investing as something like a treasure hunt, you are not aware that other people are not hunting treasures but waiting to steal it from you after you dug it out. Do not forget that its a competition and knowing how other people may react is something that you can’t ignore.
4. “Putting too much money into something you don’t fully understand is a good way to lose a lot of money. But what’s more damaging than losing money is the psychological scar tissue that remains after the money vanishes.” People speculate on stocks. Bet big on something that have not happened yet. Betting on the bright future ahead which may or may not happen. The money for sure will be gone, but the psychological scar that will remain will always haunt you. Because of the scar, it will make you afraid to take risk, when you need it to the most.
5. “Once something belongs to us, objective thinking flies out the window.” When you buy the stock, we feel that its our pride and joy. So when things go the opposite direction, we tend to keep holding on and lie to ourselves and make investing errors.
6. “Professional win points. Amateurs lose points”, therefore professionals should play to win and amateurs should play not to lose (try to make fewer mistakes). There is this concept of a “Loser’s game”, and investing is said to be a loser’s game. Which means, investing is not something you play to win, but something you must play to not lose. Which means, not to lose money instead of trying to make money.
7. “Bad things tend to happen when we compare our portfolios with others, especially if they possess a lesser IQ and extracted a higher return.” The most painful thing for a person of high intellect is to know that his dumb neighbor is getting richer faster than him. It invites wrong decision making, envy and resentment.
8. On the dangers on concentrated bets: “A single stock leveled one of the most successful funds of all time, you should think twice before putting yourself in the same type of situation.” Diversify intelligently. Don’t diversify blindly. And don’t go all in on bets without at least a safety net, a margin of safety or a little diversification.
9. “The most disciplined investors are intimately aware of how they’ll behave in different market environments, so they hold a portfolio that is suited to their personality. They don’t kill themselves trying to build a perfect portfolio because they know that it doesn’t exist.”. The most important thing is that you are not forced to sell when the market crashes. So design a portfolio that you are comfortable with through thick and thin.
10. “The average intra‐year decline for US stocks is 14%, so a little wind in the bushes is to be expected. But saber‐toothed tigers, or backbreaking bear markets, are few and far between. Corrections occur all the time, but rarely do they turn into something worse, so selling every time stocks fall a little and waiting for the dust to settle is a great way to buy high and sell low.” Cut losses are a sure way to lose money.
The book’s chapter on Buffett made it seem like its no mistake at all. The greatest mistake he made was buying retail shops like grocery and shoes and clothing stores and of course Berkshire Hathaway. His mistake was that he was always buying something far lower than liquidating value (as Graham taught him). Until that liquidating value changed faster than the price it should be sold at. The strategy that made Buffett money was also the bringer of his biggest mistake when he has a larger fund. And also the one that made him lost money later.
The act of buying great businesses, simple as it is, is a concept born from this mistake. And it all made the difference. Buy the book, I think its a great book to have available nearby. Read it when you make a mistake in your investments. Makes you feel better knowing that even the great investors make pretty dumb mistakes. And face the future with confidence and smile on your face.