Money and Finance
Like most people, I don't like being wrong. Trouble is, I'm wrong quite often.
To err is human, after all, and I've come to accept the fact that I'll make incorrect choices in the course of everyday life, such as the time I was about the head outside wearing both a corduroy jacket and corduroy trousers before my wife mercifully stopped me and corrected my obvious fashion misjudgment.
When it comes to investing matters, however, I have yet to similarly come to terms with making incorrect choices. I tend to dwell on the mistakes I've made in my portfolio far more than I enjoy the successful moves I've made. A dent to my pride can be repaired, but a permanent loss of capital cannot.
The key to managing investment mistakes, as I've come to learn the hard way, is to admit them quickly, correct the mistake, and use the expensive lesson to improve your investment process.
Good reads this week
Going for Long-Term Growth - Interactive Investor
The First Law of Thermodynamics and Investing Risk - Monevator
The Intersection of High Quality and Cheap Valuation - Fidelity
Quote of the week
"Life is not always a matter of holding good cards, but sometimes playing a poor hand well." – Jack London
Thanks for reading!
Best,
Todd
@toddwenning
- The Cost Of Self-indulgence...
From Phil Fisher in Common Stocks and Uncommon Profits: ...there is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we...
- Learning From Mistakes...
From Tren Griffin in his book Charlie Munger: The Complete Investor: Buffett has said that if you cannot explain why you failed after you have made a mistake, the business was too complex for you. In other words, Munger and Buffett like to understand...
- Phil Fisher Quote
From Common Stocks and Uncommon Profits: "...there is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made...
- 6 Signs Of A Good Investment Process
In my baseball-playing days, I was on the mound in a big playoff game, and at a key moment in the game I threw what seemed to be a good pitch, only to watch as the ball sailed over the fence for a home run. It might still be traveling somewhere over North...
- 3 Ways To Get Better At Selling Stocks
Show me somebody that has a stop-loss order of 10% below their purchase price, and I'll show you someone that's guaranteed to lose 10%. - Peter LynchIn many ways, selling a stock is a tougher decision than buying one. A quick look around Google,...
Money and Finance
Make the Most of Your Investing Mistakes
Like most people, I don't like being wrong. Trouble is, I'm wrong quite often.
To err is human, after all, and I've come to accept the fact that I'll make incorrect choices in the course of everyday life, such as the time I was about the head outside wearing both a corduroy jacket and corduroy trousers before my wife mercifully stopped me and corrected my obvious fashion misjudgment.
When it comes to investing matters, however, I have yet to similarly come to terms with making incorrect choices. I tend to dwell on the mistakes I've made in my portfolio far more than I enjoy the successful moves I've made. A dent to my pride can be repaired, but a permanent loss of capital cannot.
The key to managing investment mistakes, as I've come to learn the hard way, is to admit them quickly, correct the mistake, and use the expensive lesson to improve your investment process.
- Admit them quickly: This is the hardest part. Your research and thesis turned out to be wrong, but it's easier to be stubborn and rationalize the mistake. In my own experience, I've found that writing down my thesis before purchasing a stock has helped me own up to my mistake and not succumb to "thesis drift."
- Correct the mistake: Investors who've made a mistake often compound the mistake by either waiting for the market to correct it for them -- the classic, "I'll just hold on until the price gets back to my purchase price" -- or doubling-down on a broken thesis hoping the lower cost basis will fix things with time. In this situation, it's best to close your position and reallocate your capital to a better idea. (I should note here that if your thesis remains intact but the stock price has simply fallen a bit due to short-term concerns, that's not necessarily a mistake on your part and it may in fact be wise to hold or double down).
- Improve your investment process: Do a post-mortem on your mistake. Determine where you went wrong with your research and/or thesis and apply the lessons to your process going forward. In fact, I recommend including a pre-mortem in your investment process and think about what could go wrong before you buy the stock. For instance, ask yourself, "If the stock falls by 50%, what happened?"
Good reads this week
Going for Long-Term Growth - Interactive Investor
The First Law of Thermodynamics and Investing Risk - Monevator
The Intersection of High Quality and Cheap Valuation - Fidelity
Quote of the week
"Life is not always a matter of holding good cards, but sometimes playing a poor hand well." – Jack London
Thanks for reading!
Best,
Todd
@toddwenning
- The Cost Of Self-indulgence...
From Phil Fisher in Common Stocks and Uncommon Profits: ...there is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we...
- Learning From Mistakes...
From Tren Griffin in his book Charlie Munger: The Complete Investor: Buffett has said that if you cannot explain why you failed after you have made a mistake, the business was too complex for you. In other words, Munger and Buffett like to understand...
- Phil Fisher Quote
From Common Stocks and Uncommon Profits: "...there is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made...
- 6 Signs Of A Good Investment Process
In my baseball-playing days, I was on the mound in a big playoff game, and at a key moment in the game I threw what seemed to be a good pitch, only to watch as the ball sailed over the fence for a home run. It might still be traveling somewhere over North...
- 3 Ways To Get Better At Selling Stocks
Show me somebody that has a stop-loss order of 10% below their purchase price, and I'll show you someone that's guaranteed to lose 10%. - Peter LynchIn many ways, selling a stock is a tougher decision than buying one. A quick look around Google,...