By three methods we may learn wisdom First, by reflection, which is noblest; Second, by imitation, which is easiest; third, by experience which is bitterest.
In this post, we will see some of the most common mistakes we make while investing.
Humans are hard-wired with emotion, we are risk averse, we anchor to our purchase price, we are all manipulated with hindsight bias. Difficult as it is, we must figure out how to prevent previous mistakes from interfering with future decisions.
The best way to learn how hard investing is to do it yourself. The second best way is to examine the mistakes committed by the worlds most successful investors.
The best way to learn to invest can only be done through practice. You can’t learn how to invest through reading a book on investing, you just have to do it over and over and over again.
I hope you will enjoy the post as much as I did enjoy writing it, let’s go and see the mistake of some of the most successful investors.
1. Benjamin Graham
Benjamin Graham, the dean of Value investing has written Security Analysis in 1934 which are just as relevant today as they were in 1934. Ben Graham is to investing as what Wright Brothers are to flights.
Value Investing is
“to purchase a security at less than their intrinsic value as determined by careful analysis, with particular emphasis on buying less than liquidation value”
The most important lesson investors should take from the person who taught us the difference between value and price is that value is not a Solution. Cheap can get cheaper. Rich can get richer. Margins of safety can be miscalculated, and value can fail to materialize.
Value investing is a wonderful option over the long-term, it is not immune to the short-term vicissitudes of the market.
Try to Avoid Value Traps
It’s critically important to be aware of the value, but it’s more important not be a slave to it. Graham Taught us that there are no iron-clad laws in finance and that cheap can get cheaper.
The Intelligent Investor
2. Jesse Livermore
was a full-blooded character who happened to embody every trade maxim of the time.
Here are some of the quotes from the famous trader and market speculator
“They said there are two sides to everything. But there is only one side to the stock market and it’s not bull side or bear side, but the right side”
“The training of a stock trader is like a medical education. The physician had to spend long years learning ”
“I had made a mistake. But where? I was bearish in a bear market. That was wise, and I had sold stocks short. That was proper. But I have sold them too soon, and that was costly. My position was right but my play was wrong”
“Always sell what shows you a loss and keep what shows you a Profit”
“a man must believe in himself and his judgment if he wants to make money a living at this game. That is why I don’t believe in tips. If I buy stocks based on smith’s tips I must sell those stocks based on Smith’s tip… No sir. nobody can make big money on what someone else tells him to do”
“All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts. I have been flat broke several times, but my losses have never been a total loss. I always know I would have another chance and that I would not make the same mistake the second time. I believed in myself”
What can we learn
“if a man is both wise and lucky, he will not make the same mistake twice. But he will make any other ten thousand brothers or cousins of the original. The mistake family is so large there is always one of them around”
Investing is inherently an act of uncertainty, so we can never say to ourselves “I’ll never let this happen again”. Risk Management is part of investing. Repeating is part of investing. its all part of investing.
Focus on avoiding unforced error.
Reminiscences of a Stock Operator
3. Mark Twain
A Humorist and a highest paid writer in America.
When Dollars transmitted from our pocket to an investment, the expectation is they’ll become more in the future. But when the results disappoint us, we are loath to admit we are wrong. Our natural tendency is to hold onto the losers.
we are deferring the defeat and keeping our ego intact.
In the world of finance, nothing springs eternal like hope. we will watch out holdings fall 5% loss becomes 10%, with fear as it becomes 20% and utter terror as it falls any further.
He has speculated in a lot of new ventures and often throws good money after bad money, which resulted in his bankruptcy.
Great Line to Describe the danger of holding on to losers
“I will get out when I’m even” is a poisonous thought.
“A stock that fell from $100 to $20, that doesn’t mean it can’t easily fall to $10”
40% of stocks that experienced a 70% decline from which they never recovered.
“If you ever find yourself in a hole stop digging”
Some of his quotes
” A banker is fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain”
“I was seldom able to see an opportunity until it had ceased to be one”
“There are two times in a man’s life when he should not speculate when he can’t afford it, and when he can”
What can we learn?
Risk and reward go together as copy and paste; there cannot be one without the other.
Keep your losses manageable
The best way to avoid catastrophic losses is to decide before you invest how much you are willing to lose, either in percentage or dollar terms
This post is part 1 of the Big Mistakes by Great investors, we will release the Part 2 soon…
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3 Big Mistakes: The Best Investors and Their Worst Investments