In 1995, Janet and I were vacationing in Hong Kong. Entering downtown to register in the hotel overlooking the bay, we noticed a stench that made the odor of “old” Terre Haute seem pleasant. Touring the city we noticed something else. The lifestyle of the Hong Kong people, even then, was to walk the streets talking on their cell phone. Thousands walked the sidewalks heading for the next waiting line to catch the bus, train or ferry. Everyone hurriedly walked, then waited for ten minutes, then walked fast again, and waited again; all the time with a cell phone at their ear. It seemed as though this hustle-to-wait process was unending. Waiting in any line does not bring out my pleasant nature. We found the visit very interesting, visiting our local missionary, a school in inland China, Macau, and the best hotel we have experienced. But as we were leaving in the plane, we looked at each other and agreed, “It was interesting, but I’d never do that again.”
How many times have you said, “I’ll never do that again?” Polling our office, “never again” responses included: zip lining in a third-world country, scuba diving, dog sledding in -30 degrees, water skiing, waiting till the last day to file taxes, and sunbathing without sunscreen. When I was a teen, I remember promising myself, “I’ll never have two dates on the same night again!” Not my smartest move!
Investing is simply a subset of our lives. “Never again” can be a strength or a weakness. Starting with the Great Depression, look at the distrust that lingered with middle-class America with banks and the stock market. Recently, a client was talking about money found stashed throughout his grandmother’s house; tens of thousands! It took over thirty years (a generation) for the stock market to become a friend again to the small investor. Avoiding this “mistake” became a big mistake.
Two months after I became a registered broker, the market had fallen 40%, including the finale on October 19, 1987 collapsing 22% in a day. A prospect I had met with twice was retiring at the end of the year and was invested 100% in stock mutual funds. I was imploring him to reduce risk. The day the market collapsed, my prospect rushed to his broker, liquidated his mutual funds (getting the closing price at the market’s bottom) and placed all proceeds into CD’s. A “never again” reaction to over exposure kept him out of the market the next 12 years as stocks rose 700+% higher; a costly “never again.”
More recently, think of the lessons we learned in the dot-Com bust of 2000-2002. Hopefully, those lessons stick. When a client bails out during market stress saying, “Stop the bleeding, Frank” we learn a lesson. First, the client’s exposure to stocks was too high for their temperament and we need to make sure the euphoria of the next bull market does not resurrect excess enthusiasm in their strategy. Another “never again” I have heard from several clients is to never again invest in illiquid investments, most notably non-traded REITs. I agree with this lesson learned unless a private investment offers something unique that can outperform more liquid public alternatives.
Media serves the public distractions to a longterm mindset; filling newspapers, networks, online information, and forum opinions and discussions. Fortunately, successful investing is more a function of reducing mistakes than coming up with brilliant insights or being alerted by CNBC to a coming disaster. Rationalizing a mistake, though common, leads to nowhere.
Clinically dissecting mistakes as to why and how we got there can help us learn. Slowly and methodically we might be able to avoid the mistake again. This approach can become second nature and we become more long-term in our perspective.
Our two stock selection systems, Top Stocks and Value Stocks, are built precisely on learning from mistakes. In1993, I began with the best stock selection buy/sell criteria I could draw from my education and experience, putting it all into logical programs. As mistakes are made, Kyle and I explore the criteria to determine if it could have been avoided with sound financial/economic logic. If so, the coding is changed until the next mistake. A respected technical analyst said to me thirty years ago, “If I can be right 51% of the time, I add value.” Raising that percentage is our methodical goal. May we always grow from mistakes rather than hide from them.
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