On Investment Mistakes

On Investment Mistakes

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Recent news headline speaks of Buffett unloading Berkshire’s stake in IBM. The implication is, as the title suggests, that Buffett is mortal and do get it wrong every now and then.

While it’s obvious that if an investor call it quits after having made losses, the investment was bad. What is not so obvious, at least to me, is whether or not that bad investment was necessarily a mistake, an error of judgement.

That is, business is an organic, living, evolving organisation. It’s not human, that’s psycho. But it’s an organism that interact with the world… and some time mistakes will be made, the world will grow out of its love affair with the company’s goods and services… some times the company got lucky, over and over.

 

DON’T JUDGE A DECISION BY THE END RESULT

End results is where an investor ought to be rewarded or punished. It should not be the end point to judge a person’s ability. Other factors, most of which could be beyond the investor’s control, also affect the good or bad ending of their decision.

That is, an investor could have been right but the investment still turn out wrong. An investor could have been wrong but still have the investment turning out very right. That’s not being poetic, though it does kind of rhymes. It’s not being philosophical either, though it does sound like those very cool and cryptic Taoist and Confucian nuggets of wisdom.

Bad humour aside, what I’m trying to say is that while investment results are judged purely on its profit or loss, an investment decision is made today, based on historical and current understanding, but are judged at a future time and place. So before we promote or fire, before we congratulate or kick ourselves for the results… we need to honestly question whether the decision, at the time it was made, was done carefully, intelligently… or was it pure luck, some luck, some smarts or all smarts.

For example, you win a lottery… was it because you know how to pick the right numbers or was it pure luck? Or you select stocks that pretty much mimic the stock index, all your stocks perform as the index does but a couple unconventional, insignificant picks got lucky and you get your bonuses and a raise. OR you study all there is to know about a particular business, the past looks good, the present is great, the future looks like a monopoly… then life happen.

It “just” occurred to me, this could be a very good argument to make to the spouse when you’ve lost money – honey, I was right that it was a good idea at the time 😀  Your boss wouldn’t care though, so better get smarter and fail conventionally there.

 

BEING RIGHT, BUT WRONG. BEING WRONG, BUT RIGHT

Investment decision is made today, its results are judged in the future.

How far into the future? Every calendar year? Every three or five years?

If an investor/analyst work for someone else, their performance is usually judged and measured on an annual basis. So follow the crowd tend to be the best way to cover your hide.

For private investors managing their own affairs, we have what Buffett said is a great advantage over the professional – we can sit around and wait for that fat pitch. That and we can be patient about our, often, contrarian, picks. That as long as we know the business, its approximate value, buy at very reasonable prices… we can take our time, not fire ourselves… sit back, watch, learn and follow the progress of our decision until it either hit the target, or until “unexpected” future developments tell us to call it quit.

That beside from telling ourselves that we’re long-term investors when things “have yet” to work out our way… we ought to recognise that we grow and develop not from the results of our decisions, but from the fact that we made every effort to make that decision correctly, intelligently, carefully, at the time… how it eventually turn out, both good or bad, are lessons we could learn from.

 

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