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.
Dr. Vyshak BM says
Thank u sir for so simple well written message. I realize even I m making few of those mistakes and hope I will correct them soon. Your messages are not only adding motive to right value investing, but also adding values in general life.
Chandan Dutta says
Really we get inspired by your writings,I thought that mistakes are only for us,nobody in the world does any mistakes.
Vishal Kataria says
This post is much deeper than what the headline promises, Vishal.
Extending on your point of humility, most of us associate ourselves with the heroes in stories rather than confronting the truth — that we share many traits with the villains and that we have a lot to learn from the heroes. When that pride leads to mistakes, we portray ourselves as victims which, in turn, begins our downward spiral.
Owning up to mistakes (“I messed up”) and learning from them (“It’s my responsibility to fix this”) takes self-awareness and acceptance.
Sorry for such a rambling commit, but I’ve been reflecting over this point of humility because the lockdown brought to the fore many mistakes I committed but was either too lazy or too proud to admit.
S v deshpande says
Very good vishal.Its ABCD for investing.Keep posting.Take care
Soma Murthy says
Right now, almost all stocks are down with a few exceptions. I think, now is the wrong time to take any drastic actions. Perhaps, now is the good time to invest if you have money when you see significant pullbacks – don’t invest just because a stock has gone down a lot or a stock is going up a lot.
Recognizing a great business is critical. For instance, consider air travel. There are many airlines. Probably, some will fold. But, there are only a few airplane manufacturers. They have suffered a great deal now too. I would think the airplane manufacturers make a good business to invest in considering they also make planes for Defense.
Sandip Padwal says
Example is good, but I don’t know if we have an aeroplane manufacturing company in India. There’s HAL,but it is catering to defense sector.Please revert if there is one.
Soma Murthy says
You are right. This applies if you consider Boeing for instance.
Soma Murthy says
While this is my current analysis, let me disclose, that I did invest substantially (before Corona) in airlines such as Delta, American, and none in Boeing. AAL and DAL have dropped substantially.
Great Write up.
You may like this in the same line.
Dipakkumar Chakraborty says
Nice reading! Humility is one virtue or an attribute which we have to inculcate in our character to lead a life of peace and harmony in the present era! Being humble in all walks of life brings awareness while performing any task. While investing awareness of the stocks will enable you to take Good decisions or Bad decisions!
Mohan Lal Tejwani says
Wonderful 👍. I amazed by your skills to convince the reader. You are absolutely right. I like it, I enjoyed and learned. Thank you so much for sharing your thoughts.
With best wishes and regards 😊
Thanks a lot for sharing this insightful thoughts.
Wish You All the Best.
A great article in simple words
Even I have made as many mistakes as mentioned in the article regarding the stocks but have course corrected now in the present market downturn
Hope it bears the fruit in the future
Amrinder Mann says
There is another phenomenon called Paralysis by Analysis. One has to learn the art of probing just deep enough to reach a reasonable conclusion, have a robust checklist. And lastly, not rue to long if our projections go wrong, as humans we will have wrong assumptions, biases and habits. This is what makes each of us unique.
Thanks for a wonderful post.
Sandip Padwal says
Vishal, a good read and food for thought. This reminds me of need of good education and mentorship in the field of investing. We earlier had Guru and Shishya (Disciple) tradition, where the students used to stay in Ashram’s with their Guru’s from childhood to learn a subject or art with total devotion. This was sure way to master a skill. Somehow in the field of investing, one has to rely on mostly books and learning by trial and error and own mistakes.