Overview – Investment Mistakes Are a Treasure Trove of Lessons
From a young age, one of the first lessons we’re taught is to learn from our mistakes. Because we’re all imperfect, all of us are prone to making errors, and it is never a matter of “if” but rather “when” we will make them.
As frustrating as they are, sometimes the most important lessons can only be truly appreciated if they are taught to us through mistakes, whether our own or through others.
For some people, the mistakes they make leave a dent in their ego or sense of pride, and because of this they’re quick to discard their mistakes as nothing more than one-off nuisances. Unfortunately, some investors also behave the same way.
As frustrating as mistakes are, it would be foolish to disregard them entirely because of the abundant lessons they hold. This is true in our day-to-day lives and is most certainly true in investing as well.
Investment Mistakes are Inevitable…but Invaluable
No matter how hard an investor tries to avoid them, it’s only a matter of time before they make a mistake. After all, no investor is perfect, and even the most knowledgeable and experienced ones can still make honest mistakes now and then.
As we briefly mentioned earlier, some people view mistakes as a personal attack on their abilities and ego – some investors are no different. However, just as important life lessons are sometimes learned only through mistakes, so too is the case when it comes to learning key investing lessons.
Investors who brush off investment mistakes for the sake of maintaining their sense of pride will soon regret this decision.
The argument can be made that past investment mistakes have largely shaped what investing looks like today ranging from best practices, popular investment strategies, and general investment wisdom. It’s no exaggeration to say that were it not for those past fumbles, modern investing would not exist in its current form in today’s world.
So much of what we know about investing today originated from initially figuring out what doesn’t work. Investment mistakes continue to shape the investing world and will continue to do so far into the future, and investors will need to accept this reality whether they want to or not.
A Simple Framework for Learning From Your Investment Errors
It’s very easy to say “Learn from your mistakes”, but how exactly can we go about doing that in an effective, systematic manner? To properly learn from our blunders, a proper set of steps needs to be in place to make that happen.
Fortunately, this doesn’t have to be overly complicated. Let’s go over a sample procedure of how investors can learn from their mistakes.
Clearly Describe the Mistake and Put It in Writing
The first, and arguably most important, step is to clearly describe what the mistake was and to write it down.
This may sound like a ridiculous thing to do, trivial even. However, relying on your memory to keep track of the mistakes you’ve made is a surefire way to incorrectly recall what exactly you did, or worse, forget about important details as time passes.
By writing a detailed account of their investment mistakes, investors know exactly what they did, making that much easier to extract the lessons they need to learn from them.
For example, say that your investment mistake is written as: “Taking part in panic selling because market indices were tanking and my emotions were running high, leading me to make an emotionally driven decision.”
Detail What Sort of Damage the Mistake Inflicted
After writing down the investment mistake, the next step is to describe what sort of damage the mistake caused. Understanding what mistake was made is one thing, but knowing what exactly the consequences of that mistake are is an entirely different matter.
The more detailed this breakdown is, the more insightful the lessons learned will be.
Continuing our example of panic selling, some of the damage caused by this mistake may include:
- Letting go of a perfectly fine investment that showed no signs of needing to be sold, thereby losing a reliable anchor of our portfolio’s value, as well as a consistent source of dividends.
- Left a deep, lasting dent in our portfolio value which can’t easily be made up for by our existing holdings.
- Even if we did try to reacquire the investment we just sold, we’d do so at a considerable loss. Other investments of similar merit would also be acquired at a steep loss.
Identify What the Key Lessons/Takeaways Are
Now that we have a clear idea of the mistake we made and what the consequences of that mistake were, we can move to the final step, which is to identify the key lessons/takeaways this mistake has presented.
After realizing the damage caused by panic selling, some key lessons we can learn may be:
- Letting our emotions control our decision-making never ends well.
- Selling an investment if there are no reasonable grounds to do so is almost always a bad idea.
- Just because financial markets are in chaos doesn’t mean your portfolio is in jeopardy too. Sometimes, taking no action is the best course of action.
Like before, it’s crucial to write these down so that these lessons aren’t forgotten, and so that they can be archived along with lessons learned from other mistakes.
Not All Investment Mistakes Are Equal
Although investment mistakes are bound to happen and serve as an important source of lessons, not all of them are equal.
Some investment mistakes can range from relatively minor ones, such as making a small calculation error when performing analysis, to very costly, such as selling a perfectly fine investment just because other investors are doing the same thing, even if there are no valid reasons to do so.
Sure, major investment mistakes can teach valuable lessons, but the damage these costly blunders inflict may outweigh whatever benefits the lessons learned have to give. Very few investors can afford to lose thousands of dollars just to learn that panic selling isn’t a great idea.
Learning by repeated trial and error may be fine in other endeavours, but that certainly isn’t the case when it comes to investing.
Therefore, it’s still in an investor’s best interest to avoid making mistakes as much as they reasonably can. Sometimes, all it takes is one, or a few, major investment mistakes to completely derail an investor’s portfolio and/or career.
There’s nothing inherently wrong with making investment mistakes, but investors need to keep in mind that they can’t expect to keep taking major hits without sustaining lasting damage in the process.
Taking the Time to Study the Mistakes Made by Other Investors
Knowing how to extract lessons from their mistakes is an important skill all investors should have, and is something they should constantly refine throughout their careers.
As valuable as this skill is, many investment mistakes have most likely been made before, and most times, repeatedly.
Logically and statistically, this makes sense: given how many investors there are around the world, both at any given time and throughout history, chances are there are very few if any investment mistakes that have not already been made at least once in the past by someone else.
Investors at any given point in time have an advantage over their predecessors, and that is having access to an abundance of investment lessons that were learned from the mistakes of all the investors who came before them.
Investment mistakes are a source of valuable lessons, but that doesn’t mean you need to start from scratch and make all of those mistakes yourself.
By taking the time to carefully study the mistakes of other investors, you can learn all sorts of important lessons without having to put your own time, energy, and capital on the line. If done properly, an investor can make very few mistakes in their career, yet still reap all the benefits that learning from mistakes has to offer – a textbook example of win-win.
Good investors learn from their mistakes and never repeat them, but intelligent investors learn from the mistakes made by others, thereby avoiding the mistake altogether. Why learn the hard way when others have already done so for you in the past?
Wrapping Up
All investors are imperfect, so it’s only a matter of time before they eventually slip up now and then along their careers.
For some investors, the mistakes they make are a source of frustration, and as a result, it’s very tempting to think nothing of them. However, behind every investment mistake are lessons waiting to be learned, so it’s worth an investor’s time to stop and figure out what those are.
Fortunately, most of the mistakes that investors make today have already been made in the past, and the lessons they taught have already been extracted. By taking the time to study the mistakes that other investors have previously made, investors today can still learn the lessons that investment mistakes have to teach without dealing with the consequences.
