"I like people admitting they were complete stupid horses' asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn." – Charlie Munger
Oh yes. It's that time of year again. It's time to take a long hard look at myself as an investor, and share with you a mistake I've made in the last 12 months. After all, I need to balance out the times I boast about my good decisions.
I should first note that I have a tendency to rue missed opportunities. So I want to make it clear that (this time at least) I'm not just beating myself up.
I'm trying to identify and analyse my actual errors. Just because you made an unsuccessful investment does not mean you made a real mistake. The mistakes I'm talking about are times when your investing process failed, rather than your results.
I'd like to tell you the story of an investment I made in an illiquid, volatile and risky company (if that sounds like a scary starting point… well, you're right. It'd never qualify as a Hidden Gem, either!).
The process started out reasonably well: I spent hours researching the company, and decided that although the risks were considerable, they were sufficiently well compensated by the potential rewards.
However, because shares were so illiquid, a large dose of patience was required to buy at the right price. Any other way would push up the price considerably. I could have set a low limit order, stopped watching the price, and spent extra time researching the company. Unfortunately, I didn't do that, and ended up paying about 25% more than I would have if I'd been more patient.
My lack of patience was rewarded just as you'd expect. Within weeks, I was staring at a 25% paper loss. And worse still, I couldn't help noticing that I wouldn't be able to sell without pushing the price down even further. I could have been mentally prepared for this situation, and bought a sufficiently small holding that I could remain calm in such a situation. But unfortunately, my position size was too big for the confidence I had in the investment, so I started to worry.
Things went from bad to worse when I had a disheartening interaction with the company, and emotions began to get the better of me. I no longer felt comfortable with the size of my investment, so when some buyers appeared, I sold about half my shares at around a 15% loss to my purchase price.
Some months later, the company came out with some heartening results. And then the share price started soaring — to more than double my original purchase price. I sold some more shares (not anywhere near the top), and overall, the investment has been far from a disaster.
Importantly, though, I feel that the implementation of my investment idea was a shambles.
Mea Culpa
I lacked the patience to buy at the right price for me, and I feel that I was at a psychological disadvantage from that point onwards. The truth is I gave in to the fear of missing out… and it had me second guessing my decisions from the outset.
The second problem was that I put too much money in a very volatile company (don't forget, our Hidden Gems can be quite volatile, too — but likely not as volatile!). That's okay if you are confident — for good reason — that big swings in the value of your shareholding won't bother you.
My main mistake was that I didn't prepare myself by imagining what I would feel like if my investment was down well over 25% in a short time period. That lead to discomfort, frustration and seriously sub-optimal returns.
However, the most important lesson here is to learn from your mistakes. That's how you improve your own investing returns, over the long term. The fact is that an investment in improving your own abilities — in part by learning from your mistakes — is likely to be one of the best investments you can make!
