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Busting myths #4- Big investors don’t make mistakes

Investment guru- a person who knows it all.

The common man is mesmerized by these so-called influential investors, the profits they make, their knowledge and maturity. Every word spoken is appreciated and repeated religiously. A book on their achievements is published, they are taught in school and they become a eulogized part of history. These are the people we are asked to look up to and imbibe their successful investing experience.

But the cynic in me has always wondered, haven’t these immortals ever made mistakes? What kind of superhuman abilities do they possess that they don’t lose money like you and me? How many of these gurus created wealth by investing their own funds? Are they really experts or just fancy articulators who are either paid or pay to come on TV?


Successful investors are generally considered super intelligent, and super intelligent people don’t make mistakes. Well that’s not true. History reports several super intelligent people making blunders- Isaac Newton, Mark Twain, John Maynard Keynes, Irving Fischer to name a few were some of the very intelligent people who bombed big time in the stock markets. Long term capital management was a Hedge fund constituted by the world’s best financial minds, but the scars it left constantly remind us of intelligence gone wrong. Mistakes can occur in the most intelligent of people, so we plebs can relax.


Experienced gurus can go wrong as well. Take for example the Dextor shoes investment by the legendary Buffet. His oversight cost him dearly and he kept brooding over it time and again in his annual meetings. Sequoia’s investment in Valeant pharma and Bill Ackman’s tryst with Herbalife are other examples where the experienced investor had full information and was completely convinced about their respective investments. But the market thought differently, and prices move the other way. The illusion of control is a behavioral bias which makes investors overconfident of their ability to influence events beyond their control in order to provide superior returns. However, the variance in price depends largely on the market’s expectations which is simply too difficult to quantify. Even the most experienced and informed investor in the world cannot weigh down the unpredictability of prices set by humans, because on the other side decisions are rarely ever made with rationale.


All these Gurus honed their thinking over time as they committed mistakes themselves. Some of them like Benjamin Graham contributed extensively to the area of financial research and analysis thanks to his own failures. Similarly, Jack Bogle created the trillion-dollar low cost index fund only after continuously losing money in speculative trading. Any investor is prone at some point to make bad decisions. But retaining discipline and avoiding systemic biases can help making a few right decisions that will outweigh the occasional bad ones and humble us enough to be wary of them in the future.


Human psychology makes us believe that we are smarter than the average. Weighing our opinion higher than logical reason leads us to make erroneous decisions. These mistakes constantly remind us that nobody is perfect, and losses are a part of the investment process. It is impossible to go through a prolonged period of investment without some going in the red. Investors must not allow the psychological effects of these losses to build in the form of regret and other emotions as they can cause serious lack of judgment resulting in even heavier losses. Accepting shortcomings in strategic design and recognizing what is within and outside one’s abilities will prevent the repetition of mistakes. It is vital to go into any investment factoring the possibility of profits as well as losses and having contingencies for any black swan event.


People attempt to recreate success and others study failures to avoid them. Temporary setbacks have knocked on all our doors and it is imperative to take these mistakes in your stride without regrets. So, don’t be disappointed by your failures, just make sure you don’t repeat them too often. As for the Gurus, we tend to forget that these individuals are in no way perfect or insulated from the risks involved. The market is no less unpredictable for them than it is for us, so stop asking them where we are heading!


Investment success accrues not so much to the brilliant as to the disciplined. —William Bernstein