The four best ways to learn from investment mistakes
We explore the worlds of chess, music, medicine, and golf to find out the best ways to learn from our mistakes.
Making a mistake is never a pleasant feeling. It’s especially the case when it comes to investing. It’s often money for which you work hard, save, and it can be lost … forever. And it can sit in your gut for a long time.
It has with me. I know that I’ve tried to gloss over and even erase the memory of market losses. It seems easier that way. The trouble is, like a lot of suppressed memories, they tend to bubble to the surface years later.
There’s a better way though. It involves heeding the advice from your grandmother of ‘learning from your mistakes’. Yet, how do we best learn from investment failures? Here are four methods that I’ve found are worth trying:
1. Detach your ego from the mistake
I used to play chess quite a bit and not too long ago I went to a tournament that my friend was playing in. It was a national tournament and most of the country’s best players were competing. I happened to walk into a neighbouring room to where the main competition was taking place and observed a teacher going through a chess game on a projector in front of a large audience.
What he was doing was dissecting a game that had been played by two high-ranked players earlier that day. He was pointing out the good and the bad, and the possibilities that players had on each move. Funnily enough, the players who’d competed in the game were in the audience and contributing to the discussion.
It was a collaborative, detached, almost scientific effort. And ultimately it was about how everyone could improve their chess. I later found out that the teacher was a chess grandmaster who’d been Australia’s number one player for over 20 years.
A similar story comes from the world of music. Recently I listened to an interview with Rick Rubin, one of the greatest music producers of all time. He’s the founder of Def Jam records, and has worked with a plethora of great artists, including the Red Hot Chili Peppers, Johnny Cash, The Beastie Boys, Jay Z, and Adele.
In the interview, Rubin addresses how he gives feedback to a musician when things aren’t going to plan, and the song or album isn’t what it should be. He describes how important it is to separate the music from the artist:
“It’s never about the person. If someone takes criticism personally, the game is over. And it’s helpful to remove whatever it is we’re making from the people making it.
Taking the ego out of all of it is such a key component of allowing the thing to the best thing it can be. If it’s about you, it’s not about it.” [italics added]
Whether it be chess, music, or investments, detaching your ego from a mistake is critical to prevent repeating the same error and improving your investing skills.
2. Avoid hindsight bias
What I like to call ‘Harry Hindsight’ is a perilous thing. Unlike with chess or music, we don’t often have the time or inclination to look at an investment loss straight away. And it can be looking back at an investment that was first made three, five, or even 10 years ago.
In retrospect, mistakes can appear simple and linear. For instance, a management change at the company you invested in may have altered the strategy from one of organic growth to acquisitions, and cultural issues with the takeover targets led to problems that ultimately took their toll on profitability. Or technology may have disrupted your stock to such a degree that it had to pivot into another business which proved unsuccessful. And the list goes on.
It's important though to try to evaluate an investment decision not as it stands today, but as it stood when it was first made. With the example above, could you have foreseen that management would change strategy to pursue acquisitions? Did management give hints of that before you make the decision to invest? Could you have seen back then that slowing yet stable growth would force management into making crucial decisions about future capital allocation and deciding whether to pursue more growth or not?
Often, we don’t have the information we have now when we first made the decision to invest. Yet if we’re to learn from mistakes, it’s crucial to avoid hindsight bias.
It isn’t easy. Scientific studies show that people that are aware of hindsight bias fall for it just as much as everyone else!
3. Write it down
Writing, journaling, scribbling, whatever you want to call it, is a form of meditation and reflection. It’s a way of structuring your thoughts, doing a thorough analysis, and putting emotions to one side in favour of rationality.
Unsurprisingly, as a writer, I’ve found this is a helpful method. Not long ago, I wrote about the dumbest investment mistake that I’d ever made. It was uncomfortable, humbling, and even painful, yet it put a full stop on an investment loss that I’d previously just wanted to ignore.
4. Focus on the process
Almost all top athletes have routines. If you look at golf players closely, you’ll notice that before they putt, they’ll often bend down to observe the slope of the green, they’ll go to the opposite side of the hole to view the slope from another angle, they might talk to their caddy, and they prepare their grip on the club in a specific way – and they’ll do the same things every single time.
The reason that they have these routines is that when the stakes are high, when the pressure builds, they can rely on these routines to help them focus and relax.
It’s not dissimilar in the medical world. In 2001, a critical care specialist at Johns Hopkins Hospital named Peter Pronovost was concerned about the simple errors being made at the hospital that were leading to bad outcomes for patients. He decided to tackle so-called central line infections. These are infections that happens when germs enter the bloodstream via a central line, which is like an intravenous (IV) line.
Pronovost decided to plot out the steps to take to avoid infections when putting in a central line. They weren’t complex steps. In fact, they were steps that every doctor would regard as ‘no-brainers’.
Pronovost asked all the nurses in ICU to observe the doctors for a month and record how often they carried out each step in the process. In more than a third of cases, the doctors skipped a step.
Then, Pronovost persuaded the hospital to authorize nurses to stop doctors if they saw them skipping a step on the checklist. A year later, the results were dramatic: the line infection rate went from 11% to zero.
Pronovost later noted that the checklist helped doctors with memory recall and clearly set out the minimum necessary steps in a process.
Like golfers and doctors, the best investors have routines and checklists too. Mistakes often happen when they don’t strictly follow the process. They might skip a step. Or add a step that’s normally not part of the routine.
Individual investors may not have a process at all. And that can be the biggest mistake of all.