Joel Greenblatt once observed that learning from past investment mistakes is crucial but also extremely difficult to implement in practice. I don’t remember the exact quote but Greenblatt said something to the effect that past mistakes dress up in new clothes and come back to haunt us in the future.

This resonated with me because I have made the same type of mistake multiple times as the situation was somewhat different in each case. We seem to be prone to thinking that old mistakes do not apply because we are on guard against them. Then, the market teaches us a lesson. Still, even as learning from past mistakes is easier said than done, there is no path toward improvement unless we attempt to learn from our mistakes — and those of others.

At The Manual of Ideas, we ask most fund managers we interview about investment mistakes, so we have a repository of hundreds of answers. I’ll highlight just a few:

Howard Marks, co-chairman of Oaktree Capital Management:

“…people tend to get in trouble in investing when they have unrealistic expectations, especially when they have the expectation that higher returns can be earned without an increase of risk. That is a very dangerous expectation. Which is the thing which is most dangerous to omit? I think it is risk consciousness. I think that the great accomplishment in investing is not making a lot of money, but is making a lot of money with less-than-commensurate risk. So you have to understand risk and be very conscious of it and control it and know it when you see it. The people that I think are great investors are really characterized by exceptionally low levels of loss and infrequency of bad years. That is one of the reasons why we have to think of great investing in terms of a long time span. Short-term performance is an imposter. The investment business is full of people who got famous for being right once in a row. If you read Fooled by Randomness by [Nassim] Taleb, you understand that being right once proves nothing. You can be right once through nothing but luck. The law of large numbers says that if you have more results, you tend to drive out random error. The sample mean tends to converge with the universe mean. In other words, the apparent reality tends to converge with the real underlying reality. The great investors are the people who have made a lot of investments over a long period of time and made a lot of money, and their results show that it wasn’t a fluke — that they did it consistently. The way you do it consistently, in my opinion, is by being mindful of risk and limiting it. […]”

Watch Paul Lountzis comment on three mistakes investors make:

John Lambert, investment manager at GAM:

“Compared to most professions, investors suffer a distinct lack of useful information and feedback that would enable them to improve their processes and, ultimately, results. Knowing where and how to make small improvements across the range of skills required to deliver better returns is difficult to do, and consequently it is often put to one side and forgotten. This would be a mistake. A greater effort to understand one’s strengths and weaknesses as an investor, by deconstructing and measuring your process as thoroughly as possible, is something the thoughtful individual should constantly be striving for. Process analytics and improvement should be a core part of any investment process! […]”

Mariko Gordon, chief investment officer of Daruma Capital Management:

“It’s very important not to be prejudiced and stubborn. You have to be open-minded but you also have to be very disciplined, and grounded, and firm too. […]”

Jean-Marie Eveillard, senior adviser to First Eagle Funds:

“[The single biggest mistake] is not being value investors. Admittedly, it’s difficult not to pay attention to—everybody has a Bloomberg machine or something—not to pay attention to daily changes in stock prices. If you’re an investor in real estate, if you own a few buildings or if you own even one building, you don’t worry about the price of your building on a daily basis because there is no daily transaction. It’s less difficult to be a long-term owner if you own real estate, or in general illiquid assets, than it is with equities that trade daily. It’s not for nothing that Buffett is one of the richest men in the world. It’s because he has a very sound approach to investing. It’s not a recipe, it’s not a formula. Of course, his enormous success is due to a large extent to his own extraordinary skills. But when he wrote that article in 1984 it was in an attempt, which was a very humble attempt in a way, to say that his own success which was already obvious in the mid-1980s was due not just to his own skills, but also due to how sound his investment approach was. Most investors, including professional investors, have an investment approach—and maybe they cannot avoid it, because there is what Jeremy Grantham calls career risk, which is nothing to be ashamed of. The mistake they make is to pay too much attention to the short term. Ben Graham was right, short term, [the market] is a voting machine. You’re in the hands of market psychology if you invest in the short term. If you invest in the long term, it’s a weighing machine that weighs the realities of the business. The Frenchman who told me, hey, if we the French, we don’t buy that small stock, which you own, it will never go up. Well, no. That’s not true. It may go up after a long period of time, but it will go up if it deserves to go up. […]”

Larry Sarbit, chief investment officer of Sarbit Advisory Services:

“[Investors] allow emotion take over their investment decisions. That is undoubtedly the biggest problem. They don’t think very much at all. There’s not a lot of thought going on and so therefore don’t be surprised if things don’t work out well. They’re their own worst enemy. Investors do more damage to themselves than anybody else could do to them. If they would just think like they were going to the grocery store, again that’s Ben Graham, if you think about buying stocks, like he said, like groceries instead perfume, you’ll do a lot better. But people don’t and there’s not a heck of a lot you can do for them. The truth is that most people are not going to make money in the stock market. The vast majority of people don’t make money. It’s unfortunate but it’s almost a law that that’s the way it is. The money comes in at the wrong time and it goes out at the wrong time. I can tell you right now we’re seeing the market turn south because of rising interest rates. If the markets keep going down or if they go nowhere for the next three years, I can see exactly what investors are going to do. They’re going to get out, they’re going to stop investing, and they’re going to get out.

They keep doing this over and over and over again, generation after generation, decade after decade, century after century. The behavior just repeats over and over and over again. Not much you can do about it. But that’s what creates the incredible opportunities to buy things. It creates it for us – it’s that people don’t think. […]”

Watch Chris Karlin opine on the biggest mistakes investors make:

Bryan Lawrence, founder of Oakcliff Capital:

“[The single biggest mistake is] not having the right temperament or sufficient balance in their lives, to manage through the humbling experience of the markets. The Great Crisis found the cracks in a lot of relationships and the demons in a lot of personalities. Buffett talks about the financial consequences of a receding tide, but we should also think about the psychological consequences. Certainly the brokers don’t have to push too hard to get the clients to change managers after a bad streak. […]”

Mark Cooper, portfolio manager at First Eagle:

“…it’s really about investors not being comfortable in their own skin, and they tend to chase things that are maybe the latest fad or whatever is hot today. And you have to have patience and stay the course of your investing philosophy, but you also can’t be afraid that you’re going to miss something. And as investors become more experienced, hopefully they become more comfortable with what they know and what their circle of competence is. Don’t worry so much about what’s outside that but you just want to narrow down the investible universe or what you can possibly follow and what you can know, and focus on that. And if the opportunities present themselves take advantage of it. But if you’re always worried about what somebody else is doing or what might work the next three months or what’s going to work between now and year end, changing your roadmap gets people in trouble. […]”

Watch Robert Deaton of Fat Pitch Capital on the biggest mistake investors make — and how not to make it:

Brian Boyle, chief investment officer of Boyle Capital:

“The biggest [mistake] I see is overconfidence. The markets have a way of taking care of that though. This can be a very humbling business and it is important to remember that. […]”

Lisa Rapuano, portfolio manager of Lane Five Capital Management:

“[The single biggest mistake is] being human? Seriously. The most important thing to do is to understand your own temperament and skills, to develop a plan and to stick with it. But human nature is to go with what feels good, to look for social proof and to act out of fear and greed in times of stress. Developing an understanding of how you personally react to things and creating a structure around yourself that helps you optimize your strengths and minimize your tendency toward error is a huge advantage. Unfortunately, everything seems stacked to work against us. Even as professionals, the structure of the industry creates pressures to conform to stupid ways of investing because either they gather assets or they at least don’t get you fired. For individuals it’s even worse. It takes a lot of work to remove yourself from all the noise and the pressure and you still make mistakes. On the other hand, this is what makes our business so wonderful: you can always get better, you can always learn more and it’s never, ever boring. […]”

Listen to investor and author Stephen Weiss highlight two mistakes to avoid on the path to investment success:

Barry Pasikov, managing member of Hazelton Capital Partners:

“[The single biggest mistake is the absence of] discipline. Investing is easy to understand, but challenging to execute and that challenge comes in the form of remaining disciplined. All investors begin their journey with only the best of intentions, but frustration, and temptation, mixed in with a little self-doubt can lead anyone astray. There are four disciplines that I rely on to guide me down the value investing path: 1) stay true to your strategy; 2) recognize overconfidence; 3) control your emotions; and 4) patience. […]”

Richard Cook and Dowe Bynum, principals of Cook & Bynum Capital Management:

“While we would typically list a few (e.g., having a short-term perspective, overestimating the strength and longevity of competitive entrenchment/advantages, investing with inadequate information), the single biggest mistake has to be investing without a margin of safety (i.e. not buying a company at a large discount to a conservative appraisal of its intrinsic value). By the way, full credit for this idea goes to Ben Graham, who once wrote: ‘Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, ‘Margin of Safety.’’ There is a great quote that is generally attributable to the physicist Niels Bohr: ‘Prediction is very difficult, especially about the future.’ At its core, investing is about predicting the future cash flows of a business, which means that investors like us are inevitably going to make mistakes in their evaluation of the quality of a business or the people running it. An appropriate margin of safety serves to prevent permanent capital losses when an investor is wrong and provide outsized returns when he is correct. We only like to play the game when we know the odds are in our favor.[…]”

Simon Denison-Smith, co-founder of Metropolis Capital:

“…investors who are not undertaking sufficient analysis and due diligence in each position they invest are taking significant risks. A lack of deep understanding of a position leads to two specific challenges: 1. It is much more difficult to have a conviction of what the fundamental value of the stock is without this, which makes it psychologically more difficult to buy when the market delivers a compelling price and to have the discipline to sell when the market is over-exuberant. 2. It makes risk management much more difficult, particularly spotting when something fundamental has changed within the business. In the last 3.5 years, we have exited three positions at a loss, where the share price fall subsequent to our exit was between 70-90%. In all three cases, we were close enough to the businesses, to fully appreciate the impact of news flow that was in the public domain but had not been fully appreciated by the market. […]”

Watch Jonathan Mills and Simon Denison-Smith expound on the issue of mistakes:

Brian Bares, portfolio manager of Bares Capital Management:

“My experience tells me that individual investors run into the most trouble with the simple things: saving habits, proper diversification, and sticking to their investment policies. My peers in institutional investing probably run into the most trouble when they mistake familiarity with excellence. You may know everything there is to know about an idea, but that doesn’t necessarily make it a good idea. Also knowing when you have an edge is very difficult, but in my experience it is the critical factor that allows us to stand out in the ultra competitive world of institutional money management. […]”

Amitabh Singhi, managing director of Surefin:

“…most people enjoy the process of creating wealth but not the process of managing it, which leads to reckless behavior in investing. Most people who do not apply the same rules of wealth creation to wealth management don’t take the latter seriously enough. For instance, rarely would one start a business that one doesn’t understand. So why invest in situations that one doesn’t fully understand?”

Watch Dominic Fisher of Thistledown Investment Management share his thoughts on learning from investment mistakes:

Ori Eyal, founder of Emerging Value Capital Management:

“The key to long-term wealth creation is not earning high returns. Rather, it is earning good returns while avoiding (or minimizing) the blow-ups. The biggest mistake that investors make is not investing in a conservative enough manner. The world is a dangerous place for capital. Inflation, expropriation, revolution, currency devaluation, industry declines, wars, natural disasters, depressions, market meltdowns, black swans, theft, fraud, and taxes all pose a constant and lurking threat to growing (or even just maintaining) wealth over time. In any given year, the probability of disaster is small. But over many years and decades anything that can go wrong eventually will. […]”

Listen to Glenn Surowiec, founder of GDS Investments, share his insights:

Alan Zafran, partner of Luminous Capital:

“Investors fail to adopt a personal investment philosophy and stick with it, through thick and thin. We’re all human, right? It’s just too easy to succumb to emotion and let ‘fear and greed’ drive your asset allocation and investment decisions. Of course, nothing could be farther from rational from an investment perspective.”

Aaron Edelheit, founder of Sabre Value Asset Management:

“[The single biggest mistake that keeps investors from reaching their goals is] themselves. For investors, the combination of emotion, fear of loss, greed for gain, how your brain works are all so important and few pay attention to it. I think knowing yourself—what are your weaknesses and your strengths—is critical to being a good investor. I work on it every day. […]”

Watch Olivier Combastet of Pergam share insights into learning from mistakes:

Zeke Ashton, portfolio manager of Centaur Capital Partners:

“There are a probably an infinite number of ways one can screw things up. But I think one can capture a very large percentage of the possible mistakes under one broad roof by saying that a lack of a coherent investment strategy that makes sense and can be followed with discipline and perseverance is the biggest mistake investors make. Without an intelligent framework for making decisions, it’s awfully hard to succeed. […]”

Ken Shubin Stein, founder of Spencer Capital Management:

“…all investors can benefit by keeping an investment journal and using checklists in doing their research. These two very simple tools not only will help keep people focused on their goals and sticking with their strategy, but they will also help them avoid mistakes out of impulse. They will also protect investors from some of the cognitive biases to which we are all subject. In the checklist, it’s possible to put not only the steps necessary to do the research as well as lists of mistakes or problems that occurred in the past and should be avoided, but also a list of cognitive biases. This allows the investor to check with him or herself and to think about whether there are forces at play that may be activating some cognitive biases, and if so, to consider those. […]”

Watch Ken Shubin Stein elaborate on the issue of investment mistakes:

Guy Spier, chief executive officer of Aquamarine Capital Management:

“The biggest mistake is when we as investors stop thinking like principals. I think that when we think as principals, when we apply Ben Graham’s maxim that we should treat every equity security as part ownership in a business and think like business owners, we have the right perspective. Most of the answers flow from having that perspective. While thinking like that is not easy, and most of the time the answers are not to invest and to do nothing, the kind of decision-making that flows from that perspective tends to be good investment decision-making. […]”

Igor Lotsvin, portfolio manager of Soma Asset Management:

“[The single biggest mistake is] reacting to noise in the market and becoming emotional. Markets are often highly irrational over short periods of time – investors need to have their own assessment of a given situation and not be slaves to the market. […]”

Don Yacktman, president of Yacktman Asset Management, on how to deal with investment mistakes:

“When one makes a mistake, admit it, learn from it, move on, and try to improve on what the mistake was so that we don’t repeat it over and over again. […]”

Mark Massey, fund manager of AltaRock Partners:

“Several things come to mind as I think about it… making emotional decisions… short-term thinking instead of long… a lack of thoroughness in due diligence… These are all issues, but I think the best answer to the question is a little more subtle… and it’s that most investors fail to properly weigh and adequately take into account that they are players in a pari-mutuel betting game. So you probably know what I mean by that, but let me elaborate. So most people know how horse betting works, right? So before the race begins, all the bets are tallied up, and based upon all the bets, the odds are calculated… and so what ends up happening is that the top horses – the ones with the best pedigrees, the best jockeys, and the best track records – end up paying out very little profit when they win, which is most of the time. And while the payoff can be great when the worst horses win, the fact is, they rarely do. Investing is very much the same. Great businesses – the ones that have demonstrated competitive advantages and which have enjoyed long records of success – are almost always priced very expensively, while poor businesses are almost always correctly cheap. Consequently, it is hard to do better than average betting on either. The secret to winning in horses and in securities is the same. You need to study like mad and be really patient. Every now and then you will come across a really great business (or horse) that for one reason or another is mispriced, sometimes severely so, and this is when you invest (make a bet). The rest of the time you just keep working hard and waiting. You only bet when you are convinced that you have a near cinch. […]”

Watch Jon Heller comment on the topic of investment mistakes:

Pat Dorsey, chief investment officer of Dorsey Asset Management, on the mistake of confusing growth for competitive advantage:

“…people mistake growth for having a moat. Anyone can grow. Anyone can grow by building new stores, by underpricing a product. That doesn’t mean it’s sustainable and as investors, we’re buying a future and so that’s sustainability that really matters. There’s a competitor to Aggreko, a company that we’ve been doing a lot of work on now called APR Energy, which is UK-listed, but based in Jacksonville, Florida, and they have been winning some deals from Aggreko – we’re pretty sure – by underpricing. […]”

David Steinberg, managing Partner of DLS Capital Management, on mistakes in deep value investing:

“You cannot be in denial, you have to be pragmatic. It’s pragmatism and recognizing that we are all human in our judgment, and we do make mistakes. Recognizing mistakes and being able to act on those mistakes to change course, which we would call basically flexibility, flexibility in thinking. As much as we need discipline and be able to maintain, we need to be able to identify when we need to change directions and have the flexibility to recognize that something has changed and be able to appropriately act on it. It’s a function of a different type of discipline. It’s discipline in recognizing a change in the winds. […]”

Watch Karim Taleb of Robust Methods discuss investors’ biggest mistakes:

Martin Conder, director of Novum Capital, on mistakes investing in retailers:

“I have most often made mistakes over moats in retail. A retailer with strong physical presence in good locations might seem well defended but, in addition to these moats being eliminated by online competition, the retail market is very fluid with tastes and shop formats always changing and footfall very agile. In the UK for example Jessops and Woolworths seemed to be very well established and much loved brands, but now gone. […]”

Peter Kennan, managing partner of Black Crane Capital, on mistakes investors make in Asia:

“The biggest thing about Asia is that this is almost a paradox in that people come here because of growth and because of diversification. New opportunities give the diversification and there is growth, there’s no doubt about that. The problem in China—and I’m bullish on the growth of China. I don’t mean it’s going to go back to ten-plus percent, but will it be six, seven percent and be growing year on year on year on year. However, that doesn’t necessarily translate to shareholder returns and a lot of investors come out here with too short a time horizon. The volatility can just swamp them. If you look at the P/E ratings at the moment in China on average, they’re very low and it’s good value. Then at different times those ratings have been much higher and they own individual stocks that everybody gets conviction and excitement about because they feel it’s safe for whatever reason. A P/E of 30x is quite common amongst more popular stocks in China. The average is 11x, so if you’ve got a stock that’s 30x and it doesn’t work out so well, you’ve got a long way to fall. […]”

Watch John Gilbert of GR-NEAM comment on the mistakes insurance investors make:

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