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Special 250th Edition ebook: Mistakes that made us better investors

For the free Special 250th Edition ebook, click on the link at the end of this article.

"Regrets, I've had a few, But then again, Too few to mention,

I did what I had to do, And saw it through without exemption,

I planned each charted course, Each careful step along the byway,

And more, much more than this, I did it my way."

My Way, made famous by Frank Sinatra. © WARNER CHAPPELL MUSIC

Introduction to Special Edition

This Special 250th Edition includes over 30 market experts sharing a mistake that made them better investors.

Since Edition 1, we have focussed on independent financial journalism from finance market professionals to deliver useful insights to our community of readers, now approaching 40,000 strong.

It's an important time to learn these lessons, as the 88-year-old founder of Vanguard, Jack Bogle, recently said in a CNBC interview:

"I have never seen a market this volatile to this extent in my career. Now that's only 66 years, so I shouldn't make too much of it."

We have produced several Special Editions before, but something new happened this time. Disappointingly, some fund managers were prevented from contributing by their legal and compliance team. It's a sad state of affairs when a fund manager is prevented from admitting a mistake, as we're all supposed to learn from them. The question we asked was:

"What is an enduring investment lesson you learned from making a mistake?"

A couple of responses asked what a 'mistake' really is. Markets can hide many sins or punish good decisions, such as in this feedback:

"What is a mistake in investing? Too often managers admit to mistakes (that reveals their deep humility) that weren't mistakes; rather the market went against them. As in bridge, you can make excellent decisions with rotten outcomes and rotten decisions with excellent outcomes."

One famous local fund manager wrote that identifying a mistake can relieve stress:

"Insights from past failures can help boost performance on a new task – and this study is the first, as far as I know, to explain why. The researchers report that writing critically about past setbacks leads to lower levels of the 'stress' hormone, cortisol, and more careful choices when faced with a new stressful task, resulting in improved performance. The study, published in the journal Frontiers in Behavioral Neuroscience, is the first demonstration that writing and thinking deeply about a past failure improves the body's response to stress and enhances performance on a new task."

Another was more skeptical:

"The harsh truth is that I don’t believe any investor really learns from their mistakes in any meaningful way. By this I mean we can easily avoid investing in the same dud company, but that doesn’t stop us investing in other dud companies. We can then develop personal heuristics that steer us away from all companies that have similar traits to the dud one we lost money on, only to find out that some of them turn out to be great investments. The problem of course is that history never exactly repeats.

The reasons we make mistakes can usually find their roots in the human foibles we learn about in behavioural finance (anchoring, confirmation bias, recency bias, etc), and because we are human we keep making them. And the problem with the behavioural finance work is that its a very good descriptor of why we have stuffed up in the past, but offers little by way of prescription for future success. 

Nevertheless I reckon the biggest mistakes we are likely to make comes from over-confidence. As Twain said (words to the effect): "It ain’t what you don't know that gets you into trouble, it’s what you know for sure that just ain’t so." 

Investors become better by learning from experiences, whether or not they are considered mistakes, and sharing the lessons of market professionals may help some of our readers avoid the same mistakes.

Click here for the ebook version:

Thanks to the contributors to this Special Edition:

  • Anton Tagliaferro
  • Paul Moore
  • Justin Wood
  • Warren Bird
  • Phil Ruthven
  • Tony Hansen
  • Jonathan Rochford
  • Peter Thornhill
  • Don Ezra
  • Daniel Reyes
  • Shane Oliver
  • Alex Denham
  • David Bell
  • Liz Moran
  • Hugh Dive
  • Neil Rogan
  • Melanie Dunn
  • Brett Murray
  • Jonas Palmqvist
  • Noel Whittaker
  • Emily Martin
  • Roger Montgomery
  • Jordan Eliseo
  • Greg Cooper
  • Raewyn Williams
  • Jack Gray
  • Chris Neesom
  • Reece Birtles
  • David Bassanese
  • Gemma Dale
  • Chris Stott
  • Vinay Kolhatkar
  • Leisa Bell

 

19 Comments
Howard
May 01, 2018

Hi! I am a subscriber to your newsletter but am unable to download the eBook as the site wants me to sign up again. How do I download it as a current subscriber. Thanks.

Leisa Bell
May 01, 2018

Hi Howard, access to the Special 250th Edition ebook is unrestricted. Try this link: https://gallery.mailchimp.com/34a7cea33f33e45eedceea223/files/31f234ee-ef87-4490-b751-abb6548b23cc/Cuffelinks_Newsletter_Edition_250_Special_270418a.pdf. Cheers.

Yahya Abdal-Aziz
May 02, 2018

Thanks, Leisa, I had the same problem as Howard did. Perhaps somebody could check that clicking the download link will indeed take us directly to the PDF?

Leisa Bell
May 02, 2018

The links were working when I tried them. I've changed the page to make it clearer for others in the same situation. Thanks for letting us know. Cheers.

Chris
April 30, 2018

Congrats on your 'worst mistakes' collection of stories by fundies - too funny.

MM
April 30, 2018

Just wanted to drop you a short note on how good this week’s Cufflinks edition was. I spent a good 45 mins reading through every article which perfectly summarised all the financial advice noise. Loved the e-book too. Hope you enjoyed United’s win as well.

Peter B
April 30, 2018

"The new basic principle is that in order to learn to avoid making mistakes, we must learn from our mistakes. To cover up mistakes is, therefore, the greatest intellectual sin." — Karl Popper

Philip Carman
April 29, 2018

The "mistake" quoted of selling out of a successful investment is one most of us have experienced and so I have designed a strategy that stops that, using some levels of both arithmetically sensible and intuitively reasonable options that anyone can put into practice. Frankly, it's the best and smartest thing I've ever done and (when used) it NEVER fails...because it can't. I think it's worth a Nobel Price for Economics...but that's perhaps because it's my baby. It's also been my proprietary "secret" that only my clients have had access to...but6 now it's free to all of your readers - and I know it's safe because, like all really good ideas, few will ever use it or remember it.
Here goes: It starts with setting a Stop Loss (nothing new there) at either 8% or 12% below purchase price (I won't reveal why we might use two - that's a little for you to discuss/think about, but then the KEY is to set what we call a Profit Point at a level that you - in your wildest dreams - would not expect the stock (or any other investment for that matter) might rise to within a year of purchase. Some will set 25%, while others might go for 40% or even 60%, BUT it should be the price that you know is better than reasonable and at which you'd think it wise to sell, for the very reason that it's beyond your expectations. Here's the secret. Decide this Profit Point on the day that you buy the stock and write it down. Then ask, is this a stock I'd like to own forever (if behaves well) or is it one I'm relatively neutral about (more on that below) or is it one I'd rather NOT own (I think it's speculative - go on; admit it ; we do that, OR because it's one I already own (see below) and I regret that, so I'd be keen to sell if only it would recover... Listen up. Decide which of the three it is and decide to sell ONLY 30% of the stock when/if it reaches that Profit Point; sell 40% ONLY if the "neutral" stock hits that Profit Point and sell ONLY 50% of the stock you hate at the Profit Point. This means you have a strategy of setting a price each year - for the year ahead - at which point you'd sell a portion of your holding in a successful stock(s), while also setting a Stop Loss. That ring-fences all investments from both hubris (the Stop Loss - because you must sell 100% before the mistake becomes intolerable, but one we won't admit or do anything about) as well as our FEAR of success that makes us sell out of successful stocks. Do the maths and see what happens when you set (say) a Profit Point of 40% and sell (say) 30%, or 40% or even 50% and you'll see there's a natural tendency to leave well alone or correct weightings based on your beliefs but with the constraint that you never sell 100% of a stock that's rising. Of course, when any action is taken on a Profit Point (it could be 1 month after buying, 11 months after buying OR it may be when you review all positions annually, that you RESET all Profit Points to the prices and (wildest) expectations once again and at that point determine whether you want to set 30%, 40% or 50% as your actions. That's it! Question: what about tax? Some worry about CGT. I say "If I told you at the outset that this investment would give you a GUARANTEED 40% gain in 6 months' time but that would be taxable...would you buy it, you'd respond with "where do I back up my truck" How much can I get?" So, if after 6 months you have a40% gain that you thought was beyond reasonable as a 1 year return when you bought just 6 months ago, selling 50% now is still a great strategy, regardless of tax. Those (taxable) opportunities don't come along often; when they do you should take them! Unwillingness to pay some tax stops people making smart decisions. Question: why would anyone own a stock they don't like, hate or just plain regret? Heard of Myer? Telstra? Yep - we all make mistakes. Admitting them is not easy but it's essential. AND it's also possible that shockers recover strongly at some point, but selling 100% of a stock that's rising remains a BIG mistake. Sell 50%. Reset your Stop Loss and your Profit point and watch and wait for either to be triggered and then act accordingly. The stock that keeps on recovering will only be sold by 50% (you still hate it) rather than lost and regretted forever.
I discovered behavioural economics about 30 years ago - seeing that people make irrational decisions all the time, especially about money! Then I saw some guy win a Nobel Prize for Economics about 15 years ago when he posited that people's behaviour may not be as expected and we need to be aware of that... doh! (I'm not bitter - he deserved it, but like Tesla, I felt a little like my electric light globe moment had been ignored. :)) There is ONE thing that we can count on. We all need help to overcome our fear and our greed/hubris and this is my contribution to humanity and economics or Portfolio Construction. It works. It absolutely works. But you have to follow it absolutely. That's because you WILL be tempted to sell more or less (or do nothing) despite KNOWING at the time of purchase (when you should know all your reasons and expectations for doing so) what was sensible. We all are capable of knowing that a stock should not deliver more than x during y period of time and when it does we ignore our original (rational) thinking and either panic (sell out) or suffer from the pride of "look at me - I'm clever) and we retain 100% when we should be taking some risk off the table.
The simple rule is never take the Big Loss (that's why setting Stop Loss points at which we sell 100% is essential, but always challenging) AND never sell 100% of a winning position.
Question: what about two Stop Loss positions, as mentioned above? My rule is also to keep it simple, but for those with assistants and staff who can allow more sophisticated structures around risk management, it's also OK to set one Stop Loss at a closer price at which you sell 50% and another at your "definitely no further" price at which you sell the other 50%. Good luck.
Thank you to all of my fellow advisers, investors and those who make it their life's work to attempt to bring some sense to a world that often seems devoid of it and in which some idiots are richly rewarded, while some very astute and reasonable actors are relatively ignored or simply unknown, unrewarded and forgotten. 99% of us don't want anything more than a little recognition and appreciation and if we want more we should take the advice of some clever fellow who said "Get a dog". I too, smart at the stuff in the Royal Commission, but nowhere near as much as I smart at the actions of the dummies around us every day, who behave in ways that embarrass us all. This RC was necessary and we all need to push it to complete its work rather than be interrupted by elections, life and/or other events. Special "Thank you" to Chris Cuffe for having the foresight to set up a foundation for thinking and writing.

Graham Hand
April 30, 2018

Thanks, Philip. That's what I call a 'comment'. It's impressive if you can sustain the discipline to follow these actions.

Philip Carman
April 30, 2018

Hi Graham. The trick is to "set" them and never fail to execute. Without that discipline (I use alerts set on my Netwealth account), so I get an email when the price is reached) it can't work.

Yahya Abdal-Aziz
May 02, 2018

Thank you, Philip, for some techniques to put "behavioural finance" insights into practice! And without being too complex to master or apply ;-).

Don't suppose you've also got a recipe for the necessary discipline? Sigh …

Barry
April 29, 2018

Dear Cuffelinks, love your work! Particularly with all the commentary regarding the Royal Commission, & so called independent advice, I feel like a small fish swimming in a pool of sharks.

I would like a response from Anton Tagliaferro, regarding his comments in your 250th Edition. He talks about buying good quality companies, with a competitive advantage, recurring earnings, run by capable management that can grow. How does he reconcile this with being the 2nd largest shareholder in Myer? As a novice investor with only 40 years’ experience, compared to Jack Bogle with a 66 year career, perhaps I am missing something?

Peter
April 28, 2018

Congratulations on the 250 editions. Still easily the best read going and the Royal Commission low lights were another highlight! All the best.

Rachael
April 27, 2018

Congratulations! If I received a dollar each time a client or colleague referenced an article from Cuffelinks, I would have enough to set up my own private ancillary fund.


Thank you for the excellent reads.

Michelle Dunner
April 26, 2018

250 editions of Cuffelinks and still going strong! Congratulations to Graham Hand and your team. Always one of my favourite reads for the week.

Stephen Huppert
April 26, 2018

Congratulations to Cuffelinks on its 250th edition. That’s a lot of good reading material!

Warren Bird
April 26, 2018

Thanks for inviting me to contribute, and for having me as a contributor to Cuffelinks since its inception. I remember when you (Graham Hand) first told me about the concept, just after my pending departure from Colonial First State had been announced near the end of 2012. The opportunity to 'give back' to Chris Cuffe and to the investment community which had supported me during my 16 years there was one that I eagerly grasped.

Our industry and the people in it are facing some difficult times at the moment, but when one looks at the list of contributors to this and to Cuffelinks each week, one is reminded of the many good people, who have investor well-being as their focus, who work in funds management, planning, advice, policy making and regulation. It's their commitment and expertise that will get the industry through this.

I was only too happy to share how I've learned and improved through making mistakes. I could have chosen several more!

All the best for the next 250 issues.

Elizabeth Moran
April 26, 2018

Congratulations Graham and Cuffelinks on your 250th edition. I was pleased to be included in the expert list. Very interesting to read of past mistakes.

Peter Thornhill
April 26, 2018

Congratulations Graham. Splendid piece of work.

 

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