Learning from mistakes

I have been an investor all of my adult life and a portfolio manager and advisor for nearly 30 years.  And looking back on that lifetime of investing experience I can can affirm that I have learned more from mistakes – my own and others – than I have from my successes.

That thought was brought home after reading and article in The Motley Fool titled The Best Way to Learn As an Investor.

Capitalism is all about making, and learning from, mistakes. Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp., made this point well in Megan McArdle’s new book, The Up Side of Down. “The brain is a failure machine,” he said. “When you’re born, you have about all the neurons you’ll ever have. When you’re four, you have pretty much all the connections between those neurons you’ll ever have. Then the brain starts pruning. The brain starts shrinking. You’re actually learning by failure.” …
At a conference years ago, a young teen asked Charlie Munger how to succeed in life. “Don’t do cocaine, don’t race trains to the track, and avoid all AIDS situations,” Munger said. Which is to say: Success is less about making great decisions and more about avoiding really bad ones.

The article goes on to point out that you should try to learn by the failures of others rather than making all their mistakes yourself.  Here are a few of the biggest mistakes people make which lead to financial disaster and ruin their lives.

1. The overwhelming majority of financial problems are caused by debt, impatience, and insecurity. Most people want to appear richer than they are so they dress, drive cars and buy homes that they really can’t afford and live on borrowed money.  Living beyond your means is a recipe for disaster.

2. Complexity kills.   The investment industry is full of creative people who are busy inventing complex products.  Many of them are accidents looking for a place to happen.    The University of California system is losing more than $100 million on a complicated interest rate swap trade.  If you can’t understand an investment, stay away.  That’s why we make things simple here by focusing on simple investments that are easy to understand.  Simple investments usually win.

3. So does panic. People who survive plane crashes and being stuck in blizzards are the ones who did not panic.  If you have the desire to do something because of the emotions of either greed or fear, sit down until the feeling goes away.  Napoleon’s definition of a military genius was “the man who can do the average thing when all those around him are going crazy.” It’s the same in investing.


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