Even the Best Make Mistakes...

Benjamin Graham, the father of modern stock analysis, was so brilliant that in his last semester at Columbia University, he received job offers from three of the university’s departments – English, Mathematics, and Philosophy. Instead of choosing any of these, however, he went to Wall Street in 1914 and achieved extraordinary results. Over the course of his career, he not only established investment as a discipline in its own right, he wrote two of the most important investing books ever and taught the next generation of greats, including Walter Schloss, Irving Kahn and Warren Buffett.

But even for the best, investing is not all rainbows and ponies. In 1929, when the Dow fell 17%, Graham made it through okay with a negative 20% return. But in 1930, he went all in because he thought the worst was over. It wasn’t. Graham lost 50% that year. Between 1929 and the ultimate bottom in 1932, he lost 70%. True, that was an extraordinary time for markets. But investors don’t get to pick their era. And no matter how good you are, everyone makes mistakes.

That’s the point of Michael Batnick’s book, Big Mistakes: The Best Investors and Their Worst Investments, an entertaining, quick read on some of the truly awful things great investors have done.

Consider John Bogle, the founder of Vanguard who recently passed away. He’s done more than any other individual to transform investing through passive index funds, but he didn’t start down that road until he was 47. Before that, in the “go-go” years of the 1960s when Bogle presided over Wellington, he took what had been a storied and conservative firm and changed it into a fast-trading, high-turnover fund house that went deep into the new “modern” way of investing. That ended in disaster. When the market crashed in 1969, several funds were down by more than 50%. One fund that folded was called Techinvest, which Bogle says with undisguised disgust, “we designed to take advantage of technical analysis (I’m not kidding).”

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Most investors have been through every single one of the common mistakes listed in the box on this page. Bill Ackman made such a huge and public fuss about short-selling Herbalife, he not only painted a big target on his back for other investors to take the other side -- he also couldn’t back down when things didn’t work out (see mistake #9).

Stanley Druckenmiller thought internet stocks in 1999 were overvalued, but when betting against them didn’t work out, it was too hard to stand by and watch everyone else getting rich, so he jumped in. How did that work out? Druckenmiller said, “I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned? I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basketcase and couldn’t help myself.”

Sometimes, we get the thesis wrong -- that’s par for the course at least some of the time. But sometimes we just shoot ourselves in the foot. We get jealous -- or else we stubbornly dig in. Robert Shiller has said, “Our satisfaction with our views of the world is part of our self esteem and personal identity,” and Daniel Kahneman has said, “Ideas are part of who we are.” That means it’s enormously painful to change our minds.

A familiar pattern in Batnick’s book is that investors experience early success and then start thinking they’ve got it all figured out. That’s a big mistake. In investing, there is just too much randomness that’s beyond our control. Investing doesn’t work like the laws of physics -- and intelligence guarantees nothing. Even if we could predict next year’s earnings with perfect foresight, success isn’t guaranteed because the way people react is so unpredictable.

Batnick says that he wrote the book “not to teach you how to avoid lousy investments,” but instead “to show you that lousy investments cannot be avoided. Tough times are simply a part of the deal.”

So what can we do? Batnick suggests, “The most important thing successful investors have in common is worrying about what they can control. They don’t waste time worrying about which way the market will go or what the Federal Reserve will do or what inflation or interest rates will be next year. They stay within their circle of competence, however narrow that might be.