Making Mistakes

Investing is a humbling activity. Mistakes are inevitable. Every Warren Buffett has his Dexter Shoe Company. On top of that, there is the old saying that the market can stay irrational longer than you can remain solvent. It is often difficult (many would argue it is impossible) to distinguish between results generated through skill versus luck.

Because of this it is absolutely essential to focus on process versus outcomes. There are times you will make “mistakes” because of bad luck, despite a solid process. Other times mistakes will result from process gaps or failures. In this way you can distinguish versus “good mistakes” and “bad mistakes.” 

Good mistakes happen when you identify the correct investment thesis and you do the analysis but the investment position does not “work” (maybe because of timing). An example of this is the legion of short sellers who had The Big Short trade on in housing and mortgage bonds but ran out of time before the payoff, either because their investors ran out of patience or due to other portfolio issues.

Bad mistakes result from analytical blind spots or insufficient higher order thinking. Bad mistakes are things you should be getting right more often than not. If you dip-buy a bunch of oil companies following an oil price crash, for example, and you are not hedged to the commodity, and oil prices collapse further, and you lose even more money, then that is a bad mistake. You have fallen into a classical value trap.

The very worst mistakes are unforced errors stemming from laziness and/or hubris. Bill Ackman’s Valeant investment was the absolute worst kind of bad mistake. Not only did Ackman get Valeant spectacularly wrong, but he repeatedly deferred to Valeant management and rejected evidence contrary to his investment thesis. The result was a $4bn loss to his investors

Extrapolating beyond investing, this becomes a pretty robust framework for thinking about daily life.

Bad shit happens in life. A lot of the worst of it is completely out of our control. However, there are plenty of things you can control on a daily basis. The most foundational of these is awareness of your thought patterns and behavior.

A surprising number of people do not choose to live a particular way so much as default to the behaviors that come most naturally to them. To these individuals, every misfortune is bad luck or the cosmos conspiring against them. I guarantee you have met someone who fits this profile. You are likely related to at least one of these people: someone who is perpetually ill, or short on cash, or falling victim to some “random” calamity, pinballing from one misfortune to the next.

If your process for daily living involves no conscious effort at maintaining your health, mental acuity and financial stability, you will always be vulnerable to the random shocks the cosmos throws at you. These shocks are also more likely to have a catastrophic impact.

Process, process, process! Mistakes are inevitable. What is not a foregone conclusion is what, if anything, you will learn from them.

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