No, the best investors did not have a flawless journey
If you had bought Reliance Industries in March 2020, it would have eclipsed 10 other stocks in your portfolio which did not perform. That is the problem in most markets because a handful of stocks account for most of the returns. A proper stock selection strategy is Inevitable. Here are 5 cases where investors learnt their best lesson after losing money.
- Back in 1979 Paul Tudor Jones was averaging his long cotton positions taking it to 500 contracts; a big deal in those days. Then cotton crashed and Jones lost a fortune. He learnt that when the data is showing weakness, it is best to listen to the data. Eight years later, Tudor Jones sold ahead of the 1987 crash (single day -22%) and bought back at the lows. That trade established his reputation but he owed it to the losses in cotton.
- Warren Buffett shunned technology stocks as he did not understand them well enough. One of his choices in the technology space was IBM but Buffett soon realized that in technology it was always better to be on the cutting edge of change. Buffett exited IBM and enhanced his exposure to Apple. Today, Apple is the biggest value creator for Berkshire Hathaway; largely due to Buffett learning from his mistake.
- Fund manager Jack Bogle got caught in the frenzy of the 1960s and bought heavily into stocks at peak valuations. The stocks tanked and his fund shut down. Bogle learnt that a solid fund management strategy had to be divorced from frenzy and euphoria. That was the basis for index investing and Vanguard, which currently manages over $5 trillion in index funds globally.
- Stanley Druckenmiller is known making a billion dollars betting against the UK Pound in 1992. But even Druckenmiller was drawn by the technology euphoria of the late 1990s. However, he learnt his lesson and reverted to his macro strategy strongpoint. His fund yielded 30% CAGR over 30 years. In 2010, when he saw euphoria building up again he just would up his fund and refunded the money.
- Peter Lynch of Fidelity bought Home Depot and sold when the stock tripled soon enough. Over the next few years, Home Depot turned out to be a hundred-bagger making his star trade look inane. That day Peter Lynch realized that selling winners and holding losers was like cutting flowers and watering weeds. That was the underlying theme of his investment strategy right till Lynch retired at the age of 38.
Why early losses are more valuable?
In most of the cases, the losses for these experts did not come at the start of their investment careers. Instead, it came at a much later stage, but it did play a key role in shaping their future investment strategy. As investors you must prefer that your losses come early. Here is why.
- Early losses underline the importance of discipline, capital protection, stop losses and profit targets much more eloquently. These are important pillars of investing and nothing teaches the importance of these pillars better than your losses.
- It is easier to recover from early losses as they happen to be small. This will ensure that the losses on your investment do not really disrupt your overall financial position and you have the time and capacity to reinvent your strategy.
- Investors and traders tend to be more receptive to new ideas when they are starting off. Once they get conditioned with their ideas and opinions, they constantly try to outsmart the market, despite knowing that it is a futile exercise.
It is about recouping, not about hara-kiri
This is not an invitation to jump in and lose money. You still need to do your homework, research your stocks, measure your risk and monitor your trades. But mistakes are inevitable. If you take successful investors like Buffett, Lynch, Druckenmiller, Jones or Paulson; they have all made mistakes.
The most enduring lessons in the stock market are the lessons that you learn by losing your hard earned money. The investors with bravado end up repeating these mistakes and committing hara-kiri. The conservative lot just retreat from markets altogether. But, the intelligent investors quietly take the lessons and become better investors in the process. That must be your endeavour!