Not losing money is a critical part of the stock investing process. Successful investors say it in different ways, but the point is always the same.
Warren Buffett has often said – “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
But he has also said – “If you don’t make mistakes, you can’t make decisions.”
You see, the problem is not in making mistakes. The problem is in not knowing when you have made a mistake and thus not learning from it.
Unfortunately, openness to making mistakes and recognizing them is beyond most of us. Why is that?
Two reasons. The first, our society’s phobia for making mistakes, something that begins at school, where we learn to learn what we are taught rather than to resolve problems. We are fed with facts, and those who make the fewest mistakes are considered to be the smarter ones. So we learn that it is embarrassing to not know and to make mistakes. We feel bad when we find out we have made a mistake or do not know something.
The second reason we find it hard to recognize mistakes is our focus on outcome rather than process. We prefer the “right” result from the wrong decision to a “wrong” result from the right decision, labeling everything that does not “work out” a mistake.
In doing so, we fail to differentiate between those investors who are unaware of the inconsistency between their thoughts and actions and those who merely come to a wrong decision.
If you have read the story of Socrates’ trial and execution and what the classical Greek philosopher taught the world about humility, you know that humility is, in fact, one of the greatest assets for any person, including a stock market investor.
Practicing humility gives you the strength to fail forward. The only mistake you do not want to make is forgetting your mistakes. Ignoring the mistakes can make you lose the golden opportunity to use them as stepping stone for accumulating real wisdom.
My investing career of 19+ years has been a big bagful of mistakes, some stupid and humiliating, and the rest very stupid and very humiliating.
I have bought stocks with poor fundamentals just because they were trading cheap (Arvind), stocks without understanding their underlying businesses well (Hotel Leela), sold good stocks too early just because I was scared of losing my paper profits (Page Industries), avoided good businesses just because their stock prices were slightly higher than my ‘comfortable’ buying prices (Asian Paints), and sold good businesses whose stock prices did not seem to move for 2-3 years (Swaraj Engines).
Oh, the list is longer, but let me not embarrass myself too much at one go! 🙂
However, thankfully, my mistakes have not deterred me from working on my investment process, to improve in such a way that I avoid repeating my mistakes from the past. And that has helped me earn a satisfactory return on my investments over the past few years.
According to Peter Lynch, in investing, you are doing great if only 60% of your calls turn out to be right, so it is important to acknowledge that you will make mistakes.
Reminds me of this anecdote about Henry Ford, the father of automobile industry. Once, he was being interviewed by a friendly journalist. On being asked his secret for success, he said, “I have two words for you Sir. Good decisions.”
“And how did you learn to make good decisions?” asked the journalist curiously.
“Two words again – Bad decisions.” Ford replied. He intuitively understood the importance of learning from bad decisions.
Knowing that you do not know a lot of things, knowing that you will make a lot of mistakes, and knowing that you will be crucified for your mistakes, and accepting these as part of the journey, is what causes success in investing.
The stock market, Ken Fisher says, is a “great humiliator.” The best way to deal well with it is to play the game with complete humility, because that is the way you will help yourself from not getting humiliated too badly or too often.
That is the way this game works in your favour.
You play it this way, or you don’t.