I have always believed that to succeed in the stock market, it was “enough” to be right a little more often than wrong for many years. Buffett made mistakes, yes, but fewer than most investors.
Another objective would be not to lose everything when you are wrong, which can be achieved in at least three ways: 1- by avoiding the leverage effect of using margin to invest; 2- by diversifying one’s portfolio well among securities of quality companies operating in various industries; 3- by making sure not to pay too much for each of the securities.
Another way to reduce your errors over time is to try to learn from your mistakes. Making mistakes is certainly the most effective way to learn, provided, of course, that you accept them then study them.
I recommend documenting investment decisions, both purchases and sales of securities, when they are made. What are the reasons behind your decision? By clearly and briefly describing your process, you can subsequently study a decision that “went wrong” and hope to understand the mistakes you made.
The majority of investors remember their winning decisions vividly (perhaps they even embellish them somewhat over the years!), but they tend to forget their mistakes. This is a normal self-protection reflex. By documenting your decisions in real time, it becomes more difficult to distort reality.
I am certainly not immune to errors, far from it! The first (and it’s more a series of errors than one in particular!) occurred in the late 1990s. At that time of unbridled speculation surrounding technology stocks, but also the majority of growth companies, we had a lot of difficulty finding quality stocks at good prices. We therefore turned to securities whose valuation seemed inexpensive. The catch was that these were mostly low-quality companies.
It took us a long time (and significant losses) before we realized the hard way what many other investors had understood before us, including Buffett, who said this: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Another costly mistake was not keeping certain high-quality stocks in our portfolios because they were deemed too expensive. Years have taught me that high-quality companies are very rare – which is why they usually deserve high valuations! If you systematically sell these securities, there is little chance that you will obtain those famous “10 baggers” (and more) during your investment career. That’s what taught me that you need two-tier patience in the stock market: being very patient with high-quality companies and being impatient with companies that turn out to be of dubious quality.
And you, what mistakes have taught you the most about the stock market?
