Big Mistakes: The Best Investors and Their Worst Investments - Michael Batnick
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My recommendation: 9/10
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Summary of notes and ideas
Highly recommendated for anyone who’s interested in investing, whether from the perspective of value, growth investing or day trading.
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“Graham taught us that there are no iron‐clad laws in finance and that cheap can get cheaper.”
“And while it’s true that simplifying things generally leads to better decisions, it’s not true that every situation can be condensed into a saying. No investor is more emblematic of the dangers of heuristics than Jesse Livermore, who made and lost several fortunes, and each time came away with beautifully elegant analysis.”
“If you catch yourself saying “buy when there is blood in the streets,” it’s a good idea to remember that the man who basically invented market phrases couldn’t even stick to them. Buy low, sell high sounds great, and the idea is, but like many things, it’s easy to say, hard to do.”
“Livermore once said, “A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip. I must sell those stocks on Smith’s tip…. No sir, nobody can make big money on what someone else tells him to do.””
“Charlie Munger once said, “The iron rule of life is that only 20% of people can be in the top fifth.””
“Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is. "
“The Wellington Fund was one of the few funds to survive the Great Depression, which it owes to the prudence of its founder. The fund had 38% of its assets in cash heading into the crash of 1929. Viewed as a responsible steward of capital, Wellington would gain momentum throughout the Great Depression as many of its competitors fell by the wayside.”
“Investors who confine themselves to what they know, as difficult as that may be, have a considerable advantage over everyone else. —Seth Klarman”
“It’s not important how wide your circle of competence is, but what is critically important is that you stay inside it. Knowing what you don’t know and having a little discipline can make all the difference in the world.”
“Robert Shiller has written, “Our satisfaction with our views of the world is part of our self‐esteem.””
“Since 1962, when he first purchased stock in Berkshire Hathaway, a small textile manufacturing company in New Bedford, Massachusetts, the Dow Jones Industrial Average is up 30 fold. Berkshire Hathaway is up 33,333 fold. Buffett took control of Berkshire in 1965, and over that time, it’s grown 1,972,595%, or 20.8% annually. To give an idea of what a feat this is, $10,000 compounded at 20.8% for 52 years grows to $185,131,161.”
“Psychologists Dale Griffin and Amos Tversky wrote, “Intuitive judgments are overly influenced by the degree to which the available evidence is representative of the hypothesis in question”
“By taking the time to think something through, we can slow down and suppress impulsive actions. But take too much time, and process too much information, and we’re likely to become more confident! It all leads back to thinking we know more than we possibly can, and this is very difficult to overcome.”
“Especially publicly. I mean, flip flopping is a bad word. I love changing my mind!” This attitude stands in stark contrast to most investors, who loathe to do few things more than kill a previously held belief. Our inability to process information that challenges our ego is one of the biggest reasons why so many investors fail to capture market returns.”
“Investors would be a lot better off financially if they would just keep their personal finances personal. We can learn a lot from somebody who takes the exact opposite approach, who is one of the most vocal and public investors of all time.”
“This type of behavior, the desire to run for cover after you’ve been burned causes investors not just to underperform the market, but even their own investments. The spread between investment returns and investor returns is known as the behavior gap, and it is a permanent feature in any markets where human beings transact.”
“Your six best ideas in life will do better than all your other ones. — Bill Ruane”
“There’s an old adage in finance, “Concentrate to get rich, diversify to stay rich.”
“…you’ve spent coming to a conclusion, the harder it is to change your mind. It’s one thing for traders to buy and sell stocks at a machine‐gun pace. You buy this stock and it’s not working, so get rid of it. But for the fundamental investor, if what you consider to be one of your top ideas isn’t working, you’re more likely to add to the position than you are to come to the conclusion that you missed somethin”
“Talking about Pearson, Buffett said, “If you’re looking for a manager you want someone who is intelligent, energetic, and moral. But if they don’t have the last one, you don’t want them to have the first two.”
“Warren Buffett said, “If you understand chapters 8 and 20 of The Intelligent Investor and chapter 12 of The General Theory, you don’t need to read anything else and you can turn off your TV.””
“Before Thaler’s Nudge, Shiller’s Irrational Exuberance, and Kahneman and Tversky’s Prospect Theory, there were Keynes’s animal spirits. He realized that he could have all the information in the world, but without the ability to control his own behavior, and predict the behavior of others, it was less than meaningless”
“If one‐third of all lottery winners go bust, then three‐thirds of lucky investors revert to the mean. On this very issue, Michael Mauboussin said: “The main issue is that putting yourself in a position to enjoy good luck also puts you in a position to lose.”4 Once you’ve achieved a great deal of success, failure is usually not far behind. When investors catch a lucky break, it’s rare that people walk to the cashier, hand in their chips, and ride off into the sunset”
“You only need to get rich once. If you’ve worked hard or just got lucky and now find yourself in the top 1%, stop trying to hit home runs, you’ve already won.”
“One of the traits that separates Munger from the rest of us plebeians is that he was never distracted by opportunities that were outside his circle of competence. He once said that “we have three baskets: in, out, and too tough.”1 Investors would be wise to follow his advice: “If something is hard, we move onto something else.”
“Munger once said, “We have a passion for keeping things simple.”12 You can simplify all you want, but that still won’t insulate you from large losses. Even a 50/50 stock and bond portfolio lost a quarter of its value in the Great Financial Recession.”
“Simple rules of thumb like “if you hear something in the bushes, run” has aided our efforts in doing this. If it turned out that the noise wasn’t a saber‐tooth tiger but only wind, no harm no foul. This “run first, ask questions later” attitude is something that helped us survive in the field, but too many people have been unable to suppress this primal instinct from their investment decisions.”
“Hindsight bias leads to regret, and regret leads to poor decision making. Regret steers our brain in two distinct ways: We do nothing out of fear that we’ll make the wrong decision.”
“Whenever I speak to somebody in this position, I always ask this question: What would feel worse – you hold onto the stock and it gets cut in half, or you sell it and it doubles again? Neither of these would feel too great, but holding onto a stock and watching all the gains disappear is more mentally straining than locking in gains only to watch the stock go higher.”
“The best way to minimize future regret when you have big gains or losses is to sell some. There’s no right amount, but for example, if you sell 20% and the stock doubles, hey, at least you still have 80% of it. On the other hand, if the stock gets cut in half, hey, at least you sold some of it.”
“The difference between normal people and the best investors is that the great ones learn and grow from their mistakes, while normal people are set back by them.”
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