If you look back at the careers of the world’s most successful investors, a large majority of them have learned about successful investing in the best possible way – by making mistakes.
Warren Buffett did it with Berkshire Hathaway – the textile business. Charlie Munger admits he still makes mistakes even after many decades as a business person and investor. He has also said that it is important to “rub your nose” in your mistakes.
Doing wrong, or making mistakes (in investing or in life) is inevitable.
As Einstein once said, anyone who has never made a mistake (if there is such a person) has never tried anything new.
Munger, in fact, advises that people strive to make “new” mistakes (instead of repeating the old ones) and learn as a consequence. As he says…
There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.
Now, we have been brought up in a society where making mistakes or “being wrong” is seen as a stigma, and “being right” is always looked upon.
“How could you make such mistakes?” my Math teacher in school would often tell me.
“Don’t dare to be wrong!” I would often tell myself before committing on to something new while in my job. After all, how could you dare to be wrong when your salary and reputation depended on being right, always?
That stigma vanished after I was on my own, and started reading Munger with greater attention. In fact, I proved the “dare-to-be-wrong” philosophy instantly with my analysis of Opto Circuits, despite some clear thinking about its business, but thanks to my fuzzy thinking about its intrinsic value. 🙂
“You are dead wrong in writing about these duds!” someone wrote to me sometime in the middle of last year.
Anyways, after making so many mistakes in my investing life – things where I went wrong, and things where I was seen to be wrong – now when someone talks or writes about making mistakes, I am all ears…like when I read the latest memo from the legendary Howard Marks.
Dare to be different is his message in this memo. “Dare to be wrong,” he writes, very much like Charlie Munger told him, “It (investing) is not supposed to be easy. Anyone who finds it easy is stupid.”
You have to give yourself a chance to fail.” That’s what Kenny “The Jet” Smith said on TV the other night during the NCAA college basketball tournament, talking about a star player who started out cold and as a result attempted too few shots in a game his team lost. It’s a great way to make the point.
Failure isn’t anyone’s goal, of course, but rather an inescapable potential consequence of trying to do really well.
He then adds…
Any attempt to compile superior investment results has to entail acceptance of the possibility of being wrong.
…since conventional behavior is sure to produce average performance, people who want to be above average can’t expect to get there by engaging in conventional behavior.
Their behavior has to be different. And in the course of trying to be different and better, they have to bear the risk of being different and worse. That truth is simply unarguable. There is no way to strive for the former that doesn’t require bearing the risk of the latter.
Of course, as Marks writes, it’s important to play judiciously, to have more successes than failures, and to make more on your successes than you lose on your failures. But it’s crippling to have to avoid all failures, and insisting on doing so can’t be a winning strategy.
Such a strategy may guarantee you against losses, but it’s likely to guarantee you against gains as well.
I have seen so many people over the years who have sat on the stock market’s sidelines – either due to fear of losing money, or while waiting for a perfect opportunity to buy stocks – that they have paid huge opportunity costs of not being invested.
Then, ironically, most of these people would enter the market when it was the time to run out of the fire exit.
I see somewhat similar things happening now, when people who, for a large part of the last five years, have disbelieved the stock market’s ability to create long-term wealth, starting to pour money into stocks.
They see this as the ‘perfect time’ to join the game, assuming that rising stock prices would help them avoid any mistake of buying any kind of stocks.
So, unlike what Marks suggests you need to do succeed in the stock market – ‘dare to be wrong’ and ‘dare to be different’ – I see a lot of people around me doing the similar thing of joining this rising tide that’s lifting all boats.
No one wants to “look” wrong by staying out of stocks even when the earnings yield (inverse of P/E) suggests that the broader stock market is getting over-heated.
No one wants to “look” wrong when everyone else making money from the rising markets “looks” right.
Looking wrong means looking dumb, and we are all very smart people, you see!
In his memo, Marks quotes Lou Brock, one of baseball’s best players of the late 1960s, as saying – “Show me a guy who’s afraid to look bad, and I’ll show you a guy you can beat every time.”
The interesting part about the stock market is that wherever you look, you would fund such guys aplenty – people who are afraid to look bad, and thus people who do things that everyone else is doing.
Anyways, here is how Marks ends his memo –
Unconventional behavior is the only road to superior investment results, but it isn’t for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes.
Thus each person has to assess whether he’s temperamentally equipped to do these things and whether his circumstances will allow it…when the chips are down and the early going makes him look wrong, as it invariably will.
Not everyone can answer these questions in the affirmative. It’s those who believe they can that should take a chance on being great.
Mark these words, and note them in your investment journal – Successful investing requires the ability to look wrong for a while and survive some mistakes.
But then, are you willing to bear the embarrassment of looking wrong when all others around you are looking right?
“Love all, trust a few, do wrong to none,” said William Shakespeare.
Vishal Khandelwal writes, “In the stock market, trust few (businesses), love even fewer, but don’t fear doing wrong.” 🙂