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Zusammenfassung von Big Mistakes

Name: Big Mistakes
Rating: 4.5 (54 reviews)
Author: Michael Batnick

Michael Batnick

The Best Investors and Their Worst Investments

4.5 (54 Bewertungen)

26 Min.

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Big Mistakes by Michael Batnick is a book about learning from investing mistakes, exploring the reasons behind them & how to avoid them in the future.

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What’s in it for me? Valuable lessons without the price tag.

Financial mistakes: we all make them. From overdue library fees to parking fines, our financial mishaps can be frustrating – but they rarely cost us hundreds of millions of dollars.

And as it turns out, even the world’s most eminent investors miscalculate and end up deep in the red. Whether it’s overconfidence or an underperforming economy, it turns out the people we hold to be financial wizards are still just people too.

Here, Michael Batnick takes a select few investors and runs us through their worst investments. What’s more, he shows that we’re in a privileged position – by learning from the best’s mistakes, we receive the benefit of their hard-won wisdom without the cost of heavy losses.

In the following blinks, you’ll learn

the name of the most influential book ever written on investment;
how Warren Buffett lost over $400 million; and
why Mark Twain should have stuck to writing.

In investment, methods and techniques are useful but not infallible.

Humans naturally seek explanations for events in the world; neat little rules and tidy formulas that package things up into clear explanations. Unfortunately, the world is far too complex for this to really work – and as the legendary investor Benjamin Graham demonstrated, this is particularly true with investment.

Graham had a wildly successful financial career and authored the most influential investment book of all time: The Intelligent Investor, which was deemed “the best book on investing ever written” by the legendary Warren Buffett. But Graham’s most important act was pioneering a powerful new financial technique called value investing.

And at the heart of this concept is Graham’s observation that the price of a company fluctuates more than its value. This means that the cost of a company’s shares – its price – often doesn’t reflect the company’s value, which is a combination of things like revenue, assets and future potential.

So, why this difference between price and value?

Well, it’s because humans set prices while businesses set values – and because humans are more fickle and emotional than businesses, price and value can vary considerably. For example, when Graham watched General Electric’s valuation plummet from $1.87 billion to $784 million in the 1930s, he noted that nothing disastrous had happened to the company’s assets, employees or revenue that year – it was simply investor optimism and pessimism driving these changes.

But even Benjamin Graham couldn’t concoct a market-beating formula, and his philosophy almost ruined him during the Great Depression. After watching prices skyrocket during the 1920s, he sensed that prices and value were way out of sync. So, he decided to bet against the market, predicting prices would fall. And he was right – except he misjudged the extent of the fall.

By 1930, the stock market had taken a beating. Assuming that the worst was over, Graham began to invest heavily once again. But prices kept falling, and the market wouldn’t truly bottom out until 1932; by that time, Graham’s portfolio had lost 70 percent of its value.

Experiences like Graham’s prove there are no iron-clad laws in investing, and certainly no magic formula. Being aware of value is critical, but don’t be a slave to it. Cheap can always get cheaper.

Failing to manage your risk is fatal – even to seasoned investors.

The famous investment maxim “buy low, sell high” has endured for a reason; it simplifies one of the most complex industries around with sound logic. But ironically, the man who coined it had an irrational appetite for risk.

Jesse Livermore was born in Massachusetts in 1877. At 23, he moved to New York and secured a stockbroking job, where he made $50,000 in his first week. Things were going well, but soon Livermore made a fatal miscalculation – and it wouldn’t be his last.

Concentrated investments are a risky business.

Imagine you’ve got a nest egg tucked away. You know investing it is a risky business, but you want to give it a go anyway. You split your money between ten stocks, but soon one crashes to zero and you’ve lost 10 percent of your capital.

But if you’d split your investment between 100 companies, you would’ve lost only one percent. This is diversification: a strategy the Sequoia Fund should’ve paid more attention to.

Emotions can cloud our judgements when it comes to business deals.

Mark Twain is one of the great American novelists. He combined a sharp writing style with wry humor and an ability to convey great emotion. And, like many novelists, he put passion before logic in everything he did. In 1893, he wrote “when you fish for love, bait with your heart, not your brain.” Good advice, sure – but with such a visceral mind, it's hard to think of someone more unsuited to investing. Yet that's exactly what he pursued in his spare time.

Twain was constantly searching for the “next big thing” to revolutionize our lives. In his time, he ploughed his fortune into many non-starters – but was particularly infatuated with inventors and their devices.

Traders should never overestimate their abilities.

As a schoolkid, did you ever take a test you were sure you’d fail, only to wind up with a decent grade? If so, you probably felt pretty good about your abilities, and maybe it even encouraged you to stop studying! One possibility you probably didn’t consider, though, is that it was an unusually easy test – just like how Jerry Tsai’s plaudits probably didn’t acknowledge that the 1960s was an easy decade for investments.

Jerry Tsai was managing the firm Fidelity Capital Fund before he’d turned 30. He was a character who exuded confidence; finance’s hot prospect in the 1960s and the first celebrity fund manager. His aggressive investment style involved executing many lightning-fast trades – often instinctive and perfectly timed.

Overconfidence has cost even the best investors millions of dollars.

Imagine you’re at a soccer game. To heighten the drama, you decide to place a wager on the outcome. But it’s a tough call - both teams seem equally skilled. Once you place your bet, though, you instantly feel confident about your choice. Suddenly a fan approaches you, offering to buy your bet slip – for more than you wagered. Would you do it?

Well, according to several psychologists, it’s unlikely you would. In a famous paper from 1991, academics Kahneman, Knetsch and Thaler described what they called the endowment effect. This hypothesis argues that we ascribe more value to things simply because we own them. But it doesn’t mean our possessions are inherently appealing – it’s just harder to give them up.

Reducing unforced errors is vital to investment success.

A chess game between two grand masters is a remarkable thing, a master class in grace, accuracy and timing. Grand masters employ elaborate techniques, of course, and above all they orchestrate their pieces to cover vulnerabilities and force errors from the opponent. Just as it is in chess, so it is in finance.

The crucial idea is that professionals in any game rarely make unforced errors – their fate is usually sealed by errors that the situation forces upon them. In contrast, the outcome in contests of novices is determined by their own, avoidable mistakes. Novices shouldn’t focus on winning points – they should focus on not losing points.

Investors must take big losses in their stride.

Have you ever looked at the price history of Amazon stock? If so, you’ve probably kicked yourself for not realizing this sleeping giant would change the world. After all, an initial investment of $1,000 early on would have netted you $387,000 today! But such thinking is harmful and masks the superhuman nerve that would’ve been required to hold onto your Amazon stock. It was slashed in half on three separate occasions.

And this doesn’t just happen to the financial layperson: short-term losses test the resolve of seasoned investors too, including people like Charlie Munger.

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Worum geht es in Big Mistakes?

In Big Mistakes (2018), Michael Batnick runs through some of the world’s best-known investors and their high-profile slipups. More than just a catalog of blunders, this book also explains what each error can teach us about managing our own portfolios.

Wer Big Mistakes lesen sollte

Fledgling investors
Those fascinated by great investors
People interested in US investment history

Über den Autor

Michael Batnick is the Director of Research at Ritholtz Wealth Management. He also writes the popular blog, The Irrelevant Investor, and coproduces the podcast Animal Spirits.

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