BOOK REVIEW: What we can learn from the best investors' biggest mistakes

Big Mistakes: The Best Investors and their Worst Investments, by Michael Batnick

It was Confucius who taught that we learn wisdom by reflection, which is noblest; by imitation, which is easiest; and by experience, which is the bitterest.

The purpose of this book is achieved the second way. The author examines the biggest mistakes made by some of the world's most successful investors.

Author Michael Batnick describes investing mistakes of omission and commission: Warren Buffett and Charlie Munger's well-publicised experiences with Walmart, for example; and Stanley Druckenmiller buying tech shares as they reached their peak in early 2000.

Anyone who has invested in shares knows how difficult it is to be successful; but equally, how important it is to learn from previous mistakes.

Part of the game

Batnick’s approach is to focus on the most successful investors' failures, if for no other reason than to highlight that mistakes are simply part of the game.

"The most important thing successful investors have in common," Batnick notes, "is worrying about what they can control." It also means not wasting their time on all the factors that they cannot control.

Uncontrollable factors include which way the market will go, what the central bank might do, what inflation might cause or what the interest rates might be next year.

There are many well-known investment rules of thumb that are correct every time they are not wrong! "Buy low, sell high." "Nobody ever went broke taking a profit." "Buy when there's blood in the streets."

The problem is that they mask the complexity of investment. There are simply too many variables, all pushing and pulling on the price of shares, to reduce everything to a pithy phrase.

I will share some of the insights from just a few of the 15 famous investors covered here.


Samuel Clemens is better known as a humourist and an author, and by his pen name, Mark Twain. He was an abysmal investor, and a magnet for con men and foolish schemes.

Twain was the highest-paid writer in America but managed to lose his entire fortune, and the fortune of his coal heiress wife, through appalling investments. Is such a failure worth learning from? Many smart and wealthy people who invested with Madoff, or any of the many local ponzi or other fraudulent schemes, will say 'yes'… with hindsight.

When our positions begin to go against us, it's easy to hold on to them or even to compound the problem by investing still more. But the fact is that the deeper the hole, the harder it is to climb out. An 80% loss requires a 400% gain to just make the lost money back again.

And of course, many shares never regain their value.

If nothing else, Twain has provided the world with some brilliantly phrased investment advice: "There are two times in a man's life when he should not speculate: when he can't afford it, and when he can."

And it was he who said "A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain."

Too big to fail?

John Meriwether founded Long-Term Capital Management (LTCM) in 1994, together with two giants of financial academia and Nobel Laureates, Robert Merton and Myron Scholes. LTCM is proof that investment success does not accrue so much to the brilliant, as to the disciplined.

Investment management has attracted so many brilliant people in such large numbers, assisted by extraordinary computing power. It is no longer feasible for anyone to profit from the errors of all the others sufficiently often and by sufficient magnitude, to beat market averages. Technology and the explosion of information have levelled the playing field.

The minimum investment at LTCM was $10 million and their fees where high, but these smart minds attracted the smartest and biggest clients, nevertheless. The firm opened their doors in February 1994 with $1.25bn, the largest hedge fund opening ever. In the first 10 months they earned 20% and in 1995, the fund returned 43%.

They made the decision to return $2.7bn of capital to their original investors, pushing their leverage from 18:1 to 28:1. At one point, they had $1.25trn in open positions and they were leveraged at 100:1!

LTCM had taken financial science to its extreme and this led to losses of $1.9bn, a scale never seen before by the industry. Too big to fail, the Federal Reserve Bank of New York orchestrated a 90%, $3.6bn takeover, led by 14 Wall Street banks.

"Their biggest mistake was trusting that their models could capture how humans would behave when money and serotonin are simultaneously exploding," Batnick explains. "They made absolutely no allowance […] for the possibility of their not understanding markets and their methods being wrong."

Intelligence, combined with overconfidence, is a dangerous recipe when it comes to investment.

READ: Big mistakes that Joe Bloggs continually makes on the stock exchange

Warren Buffett is an example of an investor who was deeply aware of the limitations of his abilities. In the boom years of the 1990s, he was one of the investment managers who never bought into the hype. Buffett never stopped attempting to buy companies that did business in areas he understood.

He has had the most impressive long-term track record of anybody in the industry for more than four decades. One of the messages that was repeated over and over, was setting a proper benchmark and having realistic expectations.

But not even his every purchase has been a winner. Nor could it realistically be expected to. His 12% stake in US Air declined 76%. Dexter Shoes, for which he paid in Berkshire Hathaway shares, ended up being worthless. The Berkshire Hathaway shares would have grown by 1 350%.

If there is one takeaway, it's that investing is extremely difficult, and just when you think you have achieved mastery, the market will humble you once more.

Readability       Light --+-- Serious

Insights                      High -+--- Low

Practical           High ----+ Low

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