"If you are going to invest your own money, you are going to mess up and lose some of it periodically"by Andy Davis / July 17, 2014 / Leave a comment
If you spend too much time, as I do, reading investment commentary, you could be forgiven for concluding that none of these writers ever loses money, such is their apparent self-assurance. That’s why it made a pleasant change to read How to Make a Million Slowly by John Lee, the private investor and Liberal Democrat peer. Lee’s book is full of common sense, but what stands out is his frank dissection of the investments he has got wrong over the years. His worst mistake, he says, was to sell out of good companies too soon only to see them carry on motoring. I’ve done this and it hurts—good and timely investment ideas are very rare so taking a profit too quickly can be an expensive error.
In other cases, however, Lee admits that he just bought things he never should have touched and saw a chunk of his money vanish. I’ve done this too, and recently brought one such sad episode to a close. Back in January 2011, I read about a small British company called Carclo that had a revolutionary (and apparently cheaper) way of making touch screens for phones and tablets. The shares had risen a lot during 2010 but when they dipped in the market turmoil of summer 2011, I bought some.
The extensive catalogue of errors that this decision set in train does my credibility few favours. I bought on the basis of breathless newspaper coverage as opposed to any actual research of my own. I believed the “story” and ignored the fact that the shares were already very expensive (they were trading on about 28 times the past year’s earnings; at least 50 per cent above the level that might have made sense). And I held on after they peaked nearly 80 per cent above my purchase price and started to fall back, convinced that this was a temporary dip.
The lessons are all perfectly straightforward in hindsight. Ignore tips: if it’s in the papers, too many people know about it already and you have no possible edge. Ignore the investment story (if you can): it turns out manufacturers in Japan and China had alternative products and their weakening currencies were helping them to claim market share that Carclo had hoped to capture. I had no special knowledge that would have alerted me to these competitive threats, not being an expert on sourcing smartphone components. And don’t ignore valuation: if a share is very expensive, it represents a bet that profits are about to explode. This is always a high-stakes wager and if the company slips up as Carclo did, and as the even more expensive online retailer Asos has also recently done, your capital will shrink dramatically.
I ended up losing just over half the money I had spent buying into Carclo almost three years earlier but ultimately I was happy to sell and move on. Drawing a line under an experience like that is essential if you are ever to benefit from it. The investment lessons of this disaster are clear, but along with Lee’s book it also made me think about why it pays not to bury your bad experiences.
The value of reliving mistakes is not that it will stop you repeating them. It might, but it probably won’t. But by thinking about them instead of trying to block them out, it becomes easier to accept your mistakes for what they are: a fact of life. If you are going to invest your own money, you are going to mess up and lose some of it periodically. Mistakes in investing are always just around the corner—you have to live with them because you can’t live without them.