Investing for Survival

 Thoughts on Investing from Cullen Roche

I talk about making mistakes a lot here.  Probably because I’ve made a lot of mistakes throughout the course of my life and my career.  A big part of growing and learning is about falling down, getting back up and pushing forward only so you can fall down and get back up again.  It’s important that you try not to fall down, but it’s equally important that you understand why you fell down so you can get back up and push forward understanding your past mistakes.  This is how we evolve and improve.  So I was glad to see the latest from Howard Marks covering this topic more thoroughly than I will here:

“Mistakes are a frequent topic of discussion in our world.  It’s not unusual to see investors criticized for errors that resulted in poor performance.  But rarely do we hear about mistakes as an indispensable component of the investment process.  I’m writing now to point out that mistakes are all that superior investing is about.  In short, in order for one side of a transaction to turn out to be a major success, the other side has to have been a big mistake.

There’s an old saying in poker that there’s a “fish” (a sucker, or an unskilled player who’s likely to lose) in every game, and if you’ve played for an hour without having figured out who the fish is, then it’s you.  Likewise, in every investment transaction you’re part of, it’s likely that someone’s making a mistake.  The key to success is to not have it be you.

Usually a buyer buys an asset because he thinks it’s worth more than the price he’s paying.  But the seller sells the asset because he thinks the price he’s getting exceeds its value.  It’s pretty safe to say one of them has to be wrong.  Strictly speaking, that doesn’t have to be true, thanks to differences in things like tax status, timeframe and investors’ circumstances.  But in general, win/win transactions are much less common than win/lose transactions.  When the dust has settled after most trades, the buyer and seller are unlikely to be equally happy.

I consider it highly desirable to focus on the topic of investing mistakes.  First, it serves as a reminder that the potential for error is ever-present, and thus of the importance of mistake minimization as a key goal.  Second, if one side of every transaction is wrong, we have to ponder why we should think it’s not us.  Third, then, it causes us to consider how to minimize the probability of being the one making the mistake.”

In the world of investing, it’s unusual to find someone who won’t agree with the notion that the best lessons are generally the costliest ones.   The same could be said of life.  We are in a constant process of learning and a big part of learning is understanding why we are often wrong.  When you understand how you can be wrong you then understand how to avoid past mistakes thereby improving your future odds of being right.  So it’s important that a mistake not become a regret.  A mistake must always turn into a lesson.  That’s called progress and in this business we’re ALL always making mistakes.  The people who make progress are the ones who learn from their mistakes (as opposed to claiming they never make mistakes).

I often embrace being wrong even though it’s something I try to avoid.  The thing is, it’s guaranteed to happen in this business.  Investors are in the business of learning to be wrong so they can learn to be right.  No one enters this world or this business knowing everything.  And it’s the people who evolve and learn from their mistakes more quickly than others who stick around in this business.