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Investors should expect to make many mistakes – expect this, accept this, and still function:
Charlie Munger on the subject: “It’s natural to have decisions in each individual life that don’t work very well. We live in a world of sin, sorrow, and misdecision. That’s what human beings get to cope with in their days of life. I don’t expect the world to be free of folly and mistakes and so forth — I just hope that I’m invested with people who have more good judgment than bad judgment. I don’t know anybody who’s right all the time.” (February 2023, Daily Journal AGM)
So how do you make fewer mistakes?
- Learn from your mistakes to continually improve
- Learn from others’ mistakes
- Constantly improve your understanding of how the world works – read, read, read (intelligent stuff!)
Charlie Munger again:
“If you have good judgment, your life will work a lot better than if you have bad judgment. You get good judgment gradually over time, partly by making bad judgments and having them work out poorly. My counsel has always been to start trying to be better and keep trying to improve all of your life — and you’ve got about half a chance. If you don’t do that, you’ve got no chance.” (February 2023, Daily Journal AGM)
You’ve got to do the hard miles to get to the starting line of good judgement
Charlie Munger: “I used to say I could only teach what the other person almost knows. Then I can just [push] him over the brink when he’s hanging on the edge. But if a guy is not within miles of even starting, I never succeed. In removing idiocy, I have a 100% failing talent. I have never succeeded.” (February 2023, Daily Journal AGM)
An example of Munger’s learning process (at the age of 99): He was asked this question at the Daily Journal’s 2023 meeting: “You’ve said that you should destroy at least one good idea that you have each year. What good idea did you destroy in 2022 and anything in 2023 so far?”
CM: “The idea that I destroyed — it wasn’t a good idea, it was a bad idea. When the internet came in, I got over-charmed by the people who were leading the online retailing and I didn’t realize it’s still retailing. It may be online retailing, but it’s also still retailing. I just got a little out of focus and that made me overestimate the future returns from Alibaba. I have never [had to eliminate a mistake] twice. I keep rubbing my own nose in my own mistakes, like I’m doing now, because I think it’s good for myself.” [Munger invested heavily in Alibaba] (February 2023, Daily Journal AGM)
Warren Buffett, too, rubs his nose in his mistakes in order to keep learning
He said recently: “Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public. Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.” (Warren Buffett, 2023)
It’s important for investors to know the history of business mistakes too.
One example is IBM’s failure to capitalise on its position as the leading mainframe computer company as the world of computing evolved. Charlie Munger put it well recently: “Everybody makes mistakes. I’d say one of the most interesting things that happened in my lifetime was the rise of IBM and the fall of IBM. IBM was the most admired company in America for most of my young life. They just marched from triumph to triumph to triumph and, in the last ten or fifteen years, they’ve slipped and they’re falling back in relation to other people in their field. As the Apples and the Googles and so forth came ahead, IBM just kind of missed the boat. I think that’s almost inevitable. Kodak missed the boat of the change to digital photography, too.
“I’ve heard Bill Gates say that it’s almost the rule that [when] a really disruptive technology comes along, the incumbents screw up their reaction to it. It’s hard to change your ways when they’ve been successful for a long time and go into a totally different way of behaving and thinking.” (February 2023, Daily Journal AGM)
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
