If we plot the estimated existence of our species onto a single day,
then the stock market, as we know it today, would appear somewhere around ...
six seconds before midnight
No wonder that we find it extremely difficult not to sell our whole portfolio when there's a market crash!
No wonder we participate in buying manias, even though valuations of companies have risen to the sky!
And no freaking wonder that we find it hard to stick to our investing plans when our friends are getting rich using other strategies!
We make big mistakes in the markets simply because we're not genetically coded for this stuff
But we're in good company
Even though investing superstars like Warren Buffett, Bill Ackman, Stanley Druckenmiller and Benjamin Graham
sometimes may appear like they're from a different species, because of their abnormal successes in the stock market,
they too have faced many of the problems that you and I are facing today
They too have made big mistakes in the stock market
In this video you will learn about some of the biggest mistakes by 4 investing legends (and Mark Twain)
The purpose of sharing this is partly so that you may be able to avoid doing these mistakes in your own portfolio,
but primarily to show that mistakes are just a part of the game. Warren Buffett, Bill Ackman,
Stanley Druckenmiller, and Benjamin Graham (not Mark Twain) were able to achieve astonishing market returns over time
by learning from these experiences and by not losing sight of their long-term goals because of occasional screw-ups
This is a top 5 takeaway summary of Big Mistakes, written by Michael Batnick
And this is The Swedish Investor - giving you the tips and tools you need to reach financial freedom through stock market investing
Takeaway number 1: Warren Buffett and the availability heuristic
Warren Buffett is arguably the greatest investor of all time
Together with his right-hand man, Charlie Munger, he has created the largest conglomerate in the entire world, Berkshire Hathaway
They've accomplished this by investing successfully in companies for many decades now
But even legends such as Buffett has occasional hiccups
In 1991, Warren Buffett acquired the shoe company H.H. Brown through his Berkshire Hathaway
H.H. Brown proved to be a tremendous investing success
In 1992, Buffett bought another shoe company called Lowell Shoe. Again, the success was pretty much immediate
Therefore, it didn't come as a surprise that in 1993,
Berkshire announced the acquisition of a third company in the same industry -
Dexter Shoe
Only this time, Buffett fell for one of the most dangerous human biases when it comes to investing - the availability heuristic
The availability heuristic is:
A mental shortcut that relies on immediate examples to come to a given person's mind when evaluating a specific topic, concept, method or decision
Warren Buffett saw a company within an industry that he had been successful in on multiple occasions previously, that had a fine top management, and
that could be acquired at a fair price
No wonder this seemed to make sense to buy!
The only problem was that Dexter Shoe wasn't H.H. Brown, or even Lowell Shoe,
it just appeared to be a similar situation, and the examples were readily available in Buffett's mind
The difference was that Dexter Shoe didn't have the same type of moat around its business as the other two, and
because of this, it got crushed by low-priced competitors from countries like China
Just six years later, Berkshire Hathaway decided to write down all of the goodwill from the acquisition
They basically deemed the business of Dexter Shoe worthless
What's the lesson here? Be extra careful when you invest in a company that appears to be similar to a previously successful investment that you've made
Takeaway number 2: Mark Twain and the law of holes
Mark Twain was an incredible author who wrote books that became instant classics about the adventures of Tom Sawyer and Huckleberry Finn
The only problem (for Mark Twain's personal wallet) was that for every book he sold, he made an investment mistake
In 1880, Mark Twain invested in a typesetting machine
created by James Paige, that was supposed to replace a similar human operated machine
The venture quickly turned south, but Mark Twain kept pouring money into it
At one point he even promised to pay
$7,000 a year until the machine could bring a profit
Twain was holding on to a loser to defer his investing defeat, not obeying the law of holds
And what's the law of holes? It's that if you find yourself in one - you should quit digging
Another famous investor, David Einhorn, expressed himself like this about the law of holes:
What do we call a stock that is down 90%?
A stock that was down 80%, and then got cut in half!
Just because a stock is getting cheaper
it doesn't rule out the possibility that it can get even more cheap in the future
The difficulty lies in being able to admit defeat before it is too late
What can we learn from this?
It's important to decide beforehand how much you are willing to lose for every stock purchase that you make, either as a percentage or in absolute numbers
This way, it's much easier to quit digging before you bury your bank account in losses
Takeaway number 3: Bill Ackman and ego
Bill Ackman is one of the most famous and successful activist investors ever
An activist is an investor that uses his equity to take a stake in a company to put pressure on the management in a certain direction
A typical situation would be one where a company sits on a lot of assets, but a failing business
An activist could pressure the company to sell off its assets, so the shareholders can cash out, instead of keep throwing good money after bad
In 2012, Bill Ackman started to publicly criticize a company called Herbalife
He claimed that the company was basically a pyramid scheme, and
announced that his hedge fund, Perishing Square Capital Management, sold the company short,
meaning that, he was betting that the stock would crash
Ackman seemed convinced
In 2013, he was on Bloomberg television and
stated that his short position was between $400M - $500M in the red,
but that he would hold on to his position "to the end of the earth"
In 2018 Ackman finally exited his bet against Herbalife at an undisclosed loss
The mistake that Bill Ackman committed is in many ways similar to that of Mark Twain presented before
Because Ackman had gone out in public and expressed such strong opinions about Herbalife, it became increasingly more difficult for him to back down
Even though evidence that contradicted Ackman's theory kept pouring in, he would have none of it
What's the lesson?
We shall never forget that the purpose of investing is to make money, not to be proven right
Therefore, one must be very careful about expressing opinions about his stock market investments
It could create a situation where your ego gets in the way of making the correct financial decision
Takeaway number 4: Stanley Druckenmiller and investing that "fits"
Stanley Druckenmiller is one of the most successful macroeconomic investors of all time,
and between 1981 and 2010, investors in his hedge fund received an annual return of approximately 30%
This is an investing track record that few can compete with
Moreover, Druckenmiller was the head of George Soros' Quantum Fund between 1988 and 2000
But even Stanley Druckenmiller made his share of investing mistakes
Druckenmiller produced his abnormal
investing track record primarily by taking a macro approach and betting on stocks, bonds and currencies
Famously, he and Soros "broke the Bank of England"
in 1992 when they shorted the British Pound and earned a billion dollars on that single trade
But .... in the midst of the.com bubble, he went astray, and got involved in tech stocks
Reportedly, he bought stocks for six billion dollars in one week and
six weeks later, he had lost three of those billions
The mistake is clear:
One shouldn't venture too far out into the unknown. You must stay within your circle of competence and find an investing style that "fits"
Druckenmiller was an expert macro investor, but he didn't know much about tech
Because people were making so damn much money in tech at that time, he couldn't resist the urge to try it himself
There will be times when your style of investing is out of favour, when others are making more money than you are,
but that is just a part of the game
Takeaway number 5: Benjamin Graham and leverage
Finally yes, even the great Benjamin Graham, "the father of value investing", made mistakes at times
Benjamin Graham is
probably most famous for writing the book The Intelligent Investor and for being the teacher of previously mentioned Warren Buffett
If you want to hear more about Benjamin Graham and his style of investing, I have a whole playlist on the subject
Now, onto his mistake
Just before the Great Depression, Graham decided to put up all his money and then some
In 1929, the Dow Jones fell and Graham's portfolio fell with it
Therefore, in 1930 Graham reasoned that stocks must currently be cheap,
so he decided to leverage his portfolio and go even more than all-in
In three years, he had wiped out 70% of his investing account
The takeaway here is that no investment style is immune to short-term fluctuations in the markets
Not even that of the legendary Ben Graham
The lesson should be that an investor must construct a portfolio so that he captures enough of the upside in a bull market,
as to not feeling left behind, and so that he survives a bear market, when everyone around him loses their minds
And that's it! Remember, the great learn and grow from their mistakes, normal people are set back by them
If you want to learn more about the investing approach of the legendary Benjamin Graham, head over to my playlist of his greatest books
Cheers guys!