A Conversation About Mistakes
The best way to learn?
Mistakes are a large part of investing.
For many - myself included - they’re a larger part of investing than ideal.
And here in the world of finance, mistakes hurt more than in other fields, for one main reason: money’s involved.
Other professions are more forgiving in the face of mistakes…
Consider being an artist; Bob Ross famously said mistakes are just happy little accidents.
It’s similar in science, all hypothesis are made to be disproved. If you find a mistake - you’ve likely innovated, you’ve improved the scientific field; finding and resolving mistakes is the reason science has come so far.
Imagine we realised the Sun doesn’t orbit Earth - but we felt a little embarrassed about how wrong we were so we just ignored it…
That’s what most investors do, we shy away from every mistake because they’re uncomfortable.
It causes less immediate pain to ignore it than to rub our nose in it, so ignore it we shall!
Ironically, this approach to mistakes is a mistake.
Today, I’ll share a few ramblings that will shed some light on the nuances of investment mistakes and the best way to approach them to become better, more thoughtful investors.
Processes & Outcomes
People tend to judge mistakes based on outcomes. If an investment doubles it was genius. If it halves, it was a mistake.
But what if it was a failure because of a black swan event? Is that still a mistake?
My faded memory recalls one of Joel Greenblatt’s failed investments where he bought something that traded far below the value of its assets, then a sink hole came and destroyed said assets.
That’s a random outcome, not a mistaken process,
Outcomes are influenced by randomness, analysing them will not get you very far.
Our process is the portion that we have the most control over.
Learning from the mistakes in our process is then most likely to result in genuine improvement.
Consider this example: you have doubled your money on an investment and you begin reflection.
Outcome Analysis:
It doubled, I’m a genius.
Process Analysis
Why didn’t I allocate more capital to this idea?
Did it go up for the reasons I intended in my thesis?
Was there a better opportunity I didn’t pursue?
These are the kind of insights that cause real improvements.
If you want a valuable insight, it’ll only be valuable because not everyone has that insight. By looking at your process you open yourself to insights that most people ignore.
This thinking is scarce, which is why it’s valuable
This is Howard Marks’ idea of second-level thinking.
Check out this brilliant clip of Marks explaining why we must implement this thinking:
The process is where the insight lies. And after thinking about it, it becomes glaringly obvious.
Outcome: I have little control over this, any errors are more likely attributable to luck and randomness.
Process: I have full control over this, any errors are entirely attributable to me, and therefore can be rectified.
Putting it this way cemented the idea for me, you can only change what you can control - so focus on that.
Errors of Omission
Another perspective on mistakes that many of us miss is that we ignore the actions we never took.
I’ve never owned Nvidia stock. How can I have any mistakes to do with it?
Well, my mistake is never having owned Nvidia stock…
These are mistakes of omission, where the mistake lies in having not done something.
Buffett & Munger say these are their largest errors.
Instead of my rambling, take a couple of minutes to listen to Buffett & Munger explain this idea far better than I could:
Don’t just reflect on the things you did, reflect on the things you didn’t do and why you didn’t do them; these are the biggest mistakes we make, and they’re the ones most widely ignored.
Everything Has Something To Teach You
Something that I strongly believe is when you stop learning you stop growing.
Make everything a learning opportunity and you’ll always be growing.
When you’re willing to make mistakes and learn from them, there is only two possible outcomes:
It works out and you win
It doesn’t work out and you learn
These are the only two options when you view mistakes as learning opportunities, you win or you learn.
If you position yourself so no position can blow you up entirely, anything negative is a learning opportunity.
In fact, some famous advice from Joel Greenblatt is to actually go and lose money… Check out this clip:
I think we only truly learn something when we personally feel its full consequences.
Learning from the mistakes of others only takes us so far; the sting of over-concentration, the misery of a value trap, these are things that we tend to have to learn ourselves.
The key lies in not making the same mistake twice… Which is why we must think beyond the surface when self-reflecting, or else we are destined for a life of repeated mistakes.
Closing Thoughts
Mistakes don’t instantly make you a bad investor.
You don’t need to be right many times to be wildly successful in this game. You simply have to be willing to learn all the time. As Charlie Munger would say:
“I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”
- Charlie Munger
When you rub your nose in your mistakes you learn a lot about yourself and what needs improving.
When reflecting on mistakes, these are some questions I tend to ask myself:
Are there any investments you knew were great but didn’t pull the trigger on?
Are your winners winning for the reasons you imagined?
Why are your losers losing?
Why didn’t you pursue research on XYZ?
Before dismissing high valuation, did you fully understand the earnings potential?
These are the kinds of mistakes I often make and the questions I ask myself, maybe they’ll help you, too.
Mistakes are an under-appreciated aspect of investing. We can get ahead by simply learning from them. Something that the majority aren’t willing to do.
So here’s to making mistakes (and never making the same one twice).
Thanks a lot for reading.
Sincerely,
The Intellectual Edge
If you’re interested in how some of the successful investors look at mistakes, here are a few videos I found:
Buffett & Munger’s view:
Joel Greenblatt’s Worst Investment Mistake:
Bill Nygren’s view of mistakes:
Li Lu’s view on mistakes:
Excellent post, this post made me realise that how important is to think why we made money and why we lost. Especially the point where you talked about to find reasons that why we didn't invested in a company that showed tremendous growth.
This is an excellent Substack and is unique among the writing on investing.