Over the last one year I attended 3-4 fantastic value investing conferences. Many of the investors had spoken their heart out and many were not comfortable sharing their presentation publicly. Hence I have omitted the company and speaker names. But this compilation of mistakes of these investors could be helpful to both amateur and experienced investors.
Whenever I meet an experienced investor, I am more interested in their mistakes and not their success stories. I believe everyone investment philosophy should be as per their personality, so it’s not possible to follow someone else philosophy. But we can learn a lot from other’s mistakes. According to Dhirendra Kumar of fund tracker Value Research, Prashant Jain of HDFC mutual fund did not manage funds differently from other fund managers. “He just kept it simple and committed lesser mistakes,”. Read this fantastic article by Shane Parrish on Avoiding Stupidity is Easier than Seeking Brilliance to understand importance of studying mistakes.
Here is the list of mistakes shared by investors:
- Overlooking obvious good companies because of some small wrong acts of management eg. High remuneration, preferential issues at lower price etc. Refusing to invest in micro and small cap with fantastic business model and growth because of some IGNORABLE wrong acts of management is one of the most common mistake.
- Investing with fraudulent management
- Don’t be too close to management
- Despite sitting on 65% cash during 2007-08 crisis I did not have buy list. Important to have your buy list which you want to buy during correction.
- Chasing mediocre opportunities.
- Buying low quality cheap companies.
- Value traps
- Fraudulent companies.
- Buying statistically cheap companies.
- Buying not enough due to price anchoring bias.
- Historically making money from leveraged company insignificant.
- Take valuation risk and not insolvency risk.
- Have a clear idea about where you will and will not invest. Exclusion is a more powerful idea than inclusion. Not possible to do research on all the listed companies.
- Selling very early [This is the top mistakes of all investors]
- Difficult to time market: Successfully exited during 2007 euphoria but entered quite early.
- Buying and selling in one shot instead of in a staggered way.
- Falling in love with stock and failed to notice fundamental deterioration.
- Despite all catalyst, in-depth research process, special situation did not play out.
- Black Swan in special situations more common
- Allocation most important in special situations, max 4-5%
- Endowment bias – not listening to contrary opinion on stocks which I own.
- Commitment bias – publicly spoken about stock – made it an ego issue – could not exit the stock before crash.
- Maintain investment diary clearly writing reasons to buy/sell. WRITE REASONS for rejecting stocks too. When we write we think deeply and clearly. Use checklist to overcome various biases.
- 30% of results are not correct even if audited by big 4. That’s why it’s very important to link P&L & Balance sheet to company’s business model, terms of trade and competition. One should read notes to account carefully.
- Focus on action not on words.
- Success breeds ARROGANCE.
- Beware of quality traps – High valuation but low growth.
- Ignored valuation during tech bubble and invested in stocks quoting at PE multiple of > 100x.
- Scuttlebutt suffers from huge sampling bias. Be careful while drawing conclusion based on your interactions with ex-employees, customers, suppliers etc.
My top mistakes
- Authority Bias: Failing to do full due diligence because stock is bought by some famous investors [Which Mohnish Pabrai calls it as cloning]. Though I have never practiced blind cloning, I have realized that when you pick up stock because some famous investors have invested in it, we tend to suffer from some authority bias. But this do not undermine the advantage of cloning. One should just be aware of its side effects. I have found some investors who refuse to invest in ideas which come through other investors and some who blindly invest in successful investor ideas. Both are bad. One needs to remember that investors are like parasites who just need to hitch on to good things. Whether you discover this good thing or it comes through someone else, really does not matter. Just be sure that its a good thing based on your due diligence and conviction. There is no place for ego in investment success.
- Investing against my own personality -I cannot invest without indepth research but followed a widely diversified portfolio. I eloborated more on this here [Return per unit of time invested]
- Changing investment thesis just because of increase in price – Eg. Halonix – I invested in a classic deep value out of favor stock and when price increase by 4x and it was trading at fair value, decided to “Let the winners run”. I failed to appreciate that “Let the winners run” is appropriate only for growth stocks which enjoy strong moats for next 5-7 years and not very stock. Exiting at fair value is very important in case of Graham stocks.
- Focus on deep value rather than growth: Despite repeated reminders by many of my value investor friends I failed to appreciate the importance of growth. India is a growth market and growth stories will get re-rated faster compared to deep value. Whether one looks for growth over 2 years, 5 years or 10 years is upto each investor. But growth is a very important consideration. Now I look for minimum 20-25% profit growth over next 5 -7 years.
I would like to end this post with a contradictory thought that trying to avoid every mistake may lead to increase in errors of omission. Below is an extract from superb presentation “Moats versus Boats” by Chetan Parikh.
Request: I request all investors to share their top three past mistakes. It will benefit everyone. If you are not comfortable sharing on public platform, feel free to e-mail me at email@example.com or firstname.lastname@example.org