Big Mistakes: The Best Investors and Their Worst Investments (BY MICHAEL BATNICK)

If we plot the estimated existence of our species onto a single day, then the stock market, as we know it today, would appear somewhere around ... six seconds before midnight.

No wonder that we find it extremely difficult not to sell our whole portfolio when there here's a market crash! 

No wonder we participate in buying manias, even though valuations of companies have risen to the sky!

No freaking wonder that we find it hard to stick to our investment plans when our friends are getting rich using other strategies!

We make big mistakes in the markets simply because we're not genetically coded for this stuff But we're in good company. Even though investing superstars like Warren Buffett, Bill Ackman, Stanley Druckenmiller, and Benjamin Graham sometimes may appear like they're from a different species, because of their abnormal successes in the stock market, they too have faced many of the problems that you and I are facing today, They too have made big mistakes in the stock market. In this post, you will learn about some of the biggest mistakes by 4 investing legends (and Mark Twain). The purpose of sharing this is partly so that you may be able to avoid doing these mistakes in your own portfolio, but primarily to show that mistakes are just a part of the game. Warren Buffett, Bill Ackman, Stanley Druckenmiller, and Benjamin Graham (not Mark Twain) were able to achieve astonishing market returns over time by learning from these experiences and by not losing sight of their long-term goals because of occasional screw-ups. 

This is a Top 5 Takeaway Summary of Big Mistakes, written by Michael Batnick And this is "Healthy Mind - Think Big" - giving you the tips and tools you need to reach financial freedom through stock market investing.

Takeaway Number 1: Warren Buffett and the availability heuristic.

Warren Buffett is arguably the greatest investor of all time. Together with his right-hand man, Charlie Munger, he has created the largest conglomerate in the entire world, Berkshire Hathaway They've accomplished this by investing successfully in companies for many decades now But even legends such as Buffett has occasional hiccups. In 1991, Warren Buffett acquired the shoe company, H.H. Brown, through his Berkshire Hathaway. H.H. Brown proved to be a tremendous investing success In 1992, Buffett bought another shoe company called Lowell Shoe. Again, the success was pretty much immediate, Therefore, it didn't come as a surprise that in 1993, Berkshire announced the acquisition of a third company in the same industry - Dexter Shoe Only this time, Buffett fell for one of the most dangerous human biases when it comes to investing - the availability heuristic. 

The availability heuristic is "A mental shortcut that relies on immediate examples to come to a given person's mind when evaluating a specific topic, concept, method or decision". Warren Buffett saw a company within an industry that he had been successful in on multiple occasions previously, that had fine top management, and that could be acquired at a fair price. No wonder this seemed to make sense to buy! The only problem was that Dexter Shoe wasn't H.H. Brown or even Lowell Shoe, it just appeared to be a similar situation, and the examples were readily available in Buffett's mind. The difference was that Dexter Shoe didn't have the same type of moat around its business as the other two, and because of this, it got crushed by low-priced competitors from countries like China Just six years later, Berkshire Hathaway decided to write down all of the goodwill from the acquisition They basically deemed the business of Dexter Shoe worthless.

What's the lesson here? Be extra careful when you invest in a company that appears to be similar to a previously successful investment that you've made.

Takeaway Number 2: Mark Twain and the law of holes.

Mark Twain was an incredible author who wrote books that became instant classics about the adventures of Tom Sawyer and Huckleberry Finn. The only problem (for Mark Twain's personal wallet) was that for every book he sold, he made an investment mistake. In 1880, Mark Twain invested in a typesetting machine created by James Paige, that was supposed to replace a similar human-operated machine. The venture quickly turned south, but Mark Twain kept pouring money into it. At one point he even promised to pay $7,000 a year until the machine could bring a profit. Twain was holding on to a loser to defer his investing defeat, not obeying the law of holds. 

What's the law of holes? It's that if you find yourself in one - you should quit digging. Another famous investor, David Einhorn, expressed himself like this about the law of holes: What do we call a stock that is down 90%? A stock that was down 80%, and then got cut in half! Just because a stock is getting cheaper it doesn't rule out the possibility that it can get even cheaper in the future. The difficulty lies in being able to admit defeat before it is too late. 

What can we learn from this? It's important to decide beforehand how much you are willing to lose for every stock purchase that you make, either as a percentage or in absolute numbers. This way, it's much easier to quit digging before you bury your bank account in losses. 

Takeaway Number 3: Bill Ackman and ego.

Bill Ackman is one of the most famous and successful activist investors ever. An activist is an investor that uses his equity to take a stake in a company to put pressure on the management in a certain direction. A typical situation would be one where a company sits on a lot of assets, but a failing business. An activist could pressure the company to sell off its assets, so the shareholders can cash out, instead of keep throwing good money after bad. In 2012, Bill Ackman started to publicly criticize a company called Herbalife. He claimed that the company was basically a pyramid scheme, and announced that his hedge fund, Perishing Square Capital Management, sold the company shortly, meaning that, he was betting that the stock would crash. 

Ackman seemed convinced In 2013, he was on Bloomberg television and stated that his short position was between $400M - $500M in the red, but that he would hold on to his position "to the end of the earth" In 2018 Ackman finally exited his bet against Herbalife at an undisclosed loss. The mistake that Bill Ackman committed is in many ways similar to that of Mark Twain presented before because Ackman had gone out in public and expressed such strong opinions about Herbalife, it became increasingly more difficult for him to back down. Even though evidence that contradicted Ackman's theory kept pouring in, he would have none of it.

What's the lesson? We shall never forget that the purpose of investing is to make money, not to be proven right, Therefore, one must be very careful about expressing opinions about his stock market investments. It could create a situation where your ego gets in the way of making the correct financial decision.

Takeaway Number 4: Stanley Druckenmiller and investing that "fits". 

Stanley Druckenmiller is one of the most successful macroeconomic investors of all time, and between 1981 and 2010,  investors in his hedge fund received an annual return of approximately 30% This is an investing track record that few can compete with Moreover, Druckenmiller was the head of George Soros' Quantum Fund between 1988 and 2000 but even Stanley Druckenmiller made his share of investing mistakes. Druckenmiller produced his abnormal investing track record primarily by taking a macro approach and betting on stocks, bonds and currencies Famously, he and Soros "broke the Bank of England" in 1992 when they shorted the British Pound and earned a billion dollars on that single trade But .... in the midst of the.com bubble, he went astray and got involved in tech stocks Reportedly, he bought stocks for six billion dollars in one week and six weeks later, he had lost three of those billions. The mistake is clear: One shouldn't venture too far out into the unknown. You must stay within your circle of competence and find an investing style that "fits". Druckenmiller was an expert macro investor, but he didn't know much about tech Because people were making so damn much money in tech at that time, he couldn't resist the urge to try it himself. 

What can we learn from this? There will be times when your style of investing is out of favour, when others are making more money than you are, but that is just a part of the game.

Takeaway Number 5: Benjamin Graham and leverage

Finally yes, even the great Benjamin Graham, "The Father of Value Investing", made mistakes at times. Benjamin Graham is probably most famous for writing the book The Intelligent Investor and for being the teacher of previously mentioned Warren Buffett. If you want to hear more about Benjamin Graham and his style of investing.

Now, onto his mistake Just before the Great Depression, Graham decided to put up all his money and then some In 1929, the Dow Jones fell and Graham's portfolio fell with it, Therefore, in 1930 Graham reasoned that stocks must currently be cheap, so he decided to leverage his portfolio and go even more than all-in. In three years, he had wiped out 70% of his investing account. The takeaway here is that no investment style is immune to short-term fluctuations in the markets, not even that of the legendary Ben Graham. 

The lesson should be that an investor must construct a portfolio so that he captures enough of the upside in a bull market, as to not feeling left behind, and so that he survives a bear market, when everyone around him loses their minds.

That's it! Remember, the great learn and grow from their mistakes, normal people are set back by them. If you want to learn more about the investment books of the legendary Benjamin Graham, please leave a comment. I will consider every proposal, and I will prioritize those that most people seem to root for. In the meantime, don't forget to check out my latest posts. Also, if you want to see more posts like this one in the future, don't forget to follow Healthy Mind - Think Big. Take care guys!