We all make mistakes. Even those considered leaders or the best in their fields make mistakes.
Michael Jordan pursued professional baseball at the height of his NBA career. He got as far as AA ball before returning to the Chicago Bulls to put together another string of three championships before retiring from the Bulls.
Top corporations have delved into lines of businesses that didn’t go so well in the business world. Do you remember the Microsoft Zune? What about Apple’s foray into social media with Ping? You probably don’t remember them because they were so short-lived.
We all make mistakes. It’s how we rebound from those mistakes that define our paths. Michael Jordan came back to basketball for another 3-peat, and Apple and Microsoft have consistently been profitable by concentrating on their core competencies.
In the investing world, we have all had our fair share of failures and mistakes.
In his book, Big Mistakes: The Best Investors and Their Worst Investments, author Michael Batnick shares insights into some of the biggest mistakes some of the most successful investors in the world have made and the lessons they learned from those mistakes. Batnick hopes that investors can pivot and create successful strategies from now on by learning from mistakes.
Here are the key takeaways from investing mistakes shared by Batnick:
- Even the smartest people have mental lapses and fall prey to poor investment decisions.
- Being smart in one field does not necessarily translate to being a good investor. In other words, being a smart doctor or lawyer doesn’t ensure investing success.
- It is important to learn from the mistakes of others to avoid repeating those same mistakes and to protect and enhance your portfolio.
- Be ready to face challenges and obstacles, and arm yourself with an advance plan for all possibilities and unplanned circumstances.
- Focus on taking smart risks and exercise utmost caution even when something looks incredible and “can’t fail.”
- Understand that there are times when no one can escape from economic realities and major crashes (e.g., the Great Depression).
- Recognize your investing behavior, biases, and tendencies to avoid or mitigate investment losses.
Successful investors make many investing mistakes by acting on emotions instead of analyzing the fundamentals.
Even Warren Buffett was guilty of this folly. Regarded as one of – if not the greatest – investors worldwide, even Buffett was susceptible to behavioral biases that led to losses in his investing career. One such example of Buffett’s lapse in the 90s is provided in Batnick’s book.
In the early 90s, Buffett went on a shoe company spending spree. In 1991, his company Berkshire Hathaway acquired H.H. Brown, then in 1992, it acquired Lowell Shoe, which turned out to be a highly successful and profitable acquisition. Riding high on the success of these acquisitions, Buffett decided to go for the hat trick in 1993 and acquired Dexter Shoe.
The acquisition did not pay off. Ignoring economic fundamentals, Buffett made a rash assumption that because his first two acquisitions were successful that the third would follow suit. This did not turn out to be true, and Buffett fell victim to cognitive bias by drawing an incorrect conclusion (that the Dexter acquisition couldn’t fail) based on an ill-conceived heuristic (i.e., that he can’t fail in his shoe acquisitions), leading to a bad decision (acquiring Dexter).
On the flip side, just as we can learn from the investment mistakes of the most successful investors, we can also learn from their successes.
While learning about investment mistakes made by successful investors is valuable for forging our own investment identities, learning from their successes may be invaluable. Finding the right balance could result in successfully creating and maintaining wealth sustainably.
So, what are some good lessons we can learn from successful HNW investors?
Here are some of the most important:
- They invest in what they know, and if they don’t know something, they rely on someone who does know.
- They invest in the boring. They prefer assets with a history of predictability and performance. These assets may not generate a buzz like the newest investment kids on the block, but they have proven their worth over time.
- They invest long-term and seek illiquidity to shield their investments from broader market volatility.
- They invest in resilient assets in the face of inflation and recession.
- They’re interested in compounding wealth instead of hitting the jackpot. They seek consistency and reliability over the one-off home runs.
- They seek significant tax benefits. Saving a penny is just as valuable as adding another penny to the coffer.
Investing for many can be trial and error, but why not avoid many of those lessons and mistakes by learning from others?
But, if you make your own mistakes, learn from them and get back in the game with a new plan. The key is to get up and keep trying.