The following is an extract from a Motley Fool UK podcast, where David Kuo spoke to Tom and David Gardner, co-founders of The Motley Fool. Our mistakes are the greatest way that we learn. I don’t mean we shouldn’t learn from our successors — there are great things to learn from the smartest decisions we make in life and as investors, but there really is a rich amount of data: insight assumptions, challenges, thoughts, conclusions — there’s a really rich trove of information that you can take from each of your mistakes as an investor. Remember that, in…
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Our mistakes are the greatest way that we learn.
I don’t mean we shouldn’t learn from our successors — there are great things to learn from the smartest decisions we make in life and as investors, but there really is a rich amount of data: insight assumptions, challenges, thoughts, conclusions — there’s a really rich trove of information that you can take from each of your mistakes as an investor.
Remember that, in order to succeed as an investor, you’ve got to be right about six out of ten times. That makes you a great investor. If you get up between six and seven, you are so hall-of-fame ready. You are one of the greatest investors that’s out there. So that means that even the greatest are going to have three mistakes out of ten.
I think the really wonderful investors are willing to continue to hold if they believe, and in the face of that, are willing to go back and learn from it, if they were proven wrong.
Avoid repeating your mistakes
The real problem is for the person who simply trades out of it and moves on. That increases the likelihood that you will repeat that mistake, and you will endlessly be out there saying, well, I’ve got the traditional, strong, solid, conservative, well-run business that’s mentioned in the financial magazines all the time. I’ve got the Eastman Kodak of this industry, and you’ll continue to invest that way, instead of looking very closely at that investment, and the assumptions you’ve made, and saying, wow – they were completely disrupted. How can I make sure to either be very much on the lookout for disruptions in any investment that I’m making, or how do you find the disruptors, because they’ve probably made a lot of money over the last decade. They’ve taken the business away from Eastman Kodak. It isn’t like the industry has simply vanished. Photography is actually more popular now than ever before. But who took those spoils, and how — and what can I learn about it?
The logic of failure
There’s a wonderful book entitled The Logic of Failure. I think everyone should read that book, just because you learn to embrace and love your mistakes in life, in a world where we’re taught again and again to shy away from them, or not make them in the first place, or that we should be humiliated if we blew it on something.
But instead, we should look at it, and go: “Gosh, I blew it there. I made a mistake and this is what I’ve learnt from it.” So if I were an Eastman Kodak investor, and I’ve had some terrible investments over 20 years, the ones that I go back and look at and try and learn from are the ones that cause my greatest next success.
A 40 stock portfolio
One other principle that I have in investing is I don’t think you should have three stocks or five stocks. My feeling is, in the first decade of your investment career, you should be getting your portfolio up to 40 stocks, because you want to learn from as many situations as possible, and you want to set yourself up that, if anyone of them goes bankrupt, or any four of them go down 60% over your investment period, that’s not going to shake the foundation of your overall portfolio.
I know it may sound like a lot to follow with 40 stocks, but you don’t have to be on top. In order to be a fan of a sport, you don’t have to watch every minute of every game. Some fans go to a few games a year, and just take a look at the standings every couple of weeks, and they don’t change their team, just because they had a bad season. So to me, I think having a stock portfolio with enough stocks so that, if a few go down, you’re not going to be shaken away from investing, is a great way to get started.