Big Mistakes: The Best Investors and Their Worst Investments PDF
Preview Big Mistakes: The Best Investors and Their Worst Investments
Table of Contents Cover Preface CHAPTER 1: Benjamin Graham Notes CHAPTER 2: Jesse Livermore Notes CHAPTER 3: Mark Twain Notes CHAPTER 4: John Meriwether Notes CHAPTER 5: Jack Bogle Notes CHAPTER 6: Michael Steinhardt Notes CHAPTER 7: Jerry Tsai Notes CHAPTER 8: Warren Buffett Notes CHAPTER 9: Bill Ackman Notes CHAPTER 10: Stanley Druckenmiller Notes CHAPTER 11: Sequoia Notes CHAPTER 12: John Maynard Keynes Notes CHAPTER 13: John Paulson Notes CHAPTER 14: Charlie Munger Notes CHAPTER 15: Chris Sacca Notes CHAPTER 16: Michael Batnick Notes About the Author Index End User License Agreement Since 1996, Bloomberg Press has published books for financial professionals, as well as books of general interest in investing, economics, current affairs, and policy affecting investors and business people. Titles are written by well-known practitioners, BLOOMBERG NEWS® reporters and columnists, and other leading authorities and journalists. Bloomberg Press books have been translated into more than 20 languages. For a list of available titles, please visit our website at www.wiley.com/go/bloombergpress. BIG MISTAKES The Best Investors and Their Worst Investments Michael Batnick Copyright © 2018 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the Web at www.copyright.com. 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Title: Big mistakes : the best investors and their worst investments / Michael Batnick. Description: Hoboken : Bloomberg Press, 2018. | Series: Bloomberg | Includes index. | Identifiers: LCCN 2018008845 (print) | LCCN 2018011282 (ebook) | ISBN 9781119366416 (epub) | ISBN 9781119366430 (pdf) | ISBN 9781119366553 (hardback) Subjects: LCSH: Investments. | Securities. | BISAC: BUSINESS & ECONOMICS / Investments & Securities. Classification: LCC HG4521 (ebook) | LCC HG4521 .B38 2018 (print) | DDC 332.6—dc23 LC record available at https://lccn.loc.gov/2018008845 Cover Design: Wiley Cover Image: © LUHUANFENG / iStockphoto To my mother and father who let me make mistakes, and to Robyn who stuck with me when I made them Preface By three methods may we learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest. —Confucius Making money in the stock market is difficult. Whether you're running a hedge fund or your own brokerage account, there will be times when you feel really foolish. In the event of a market downturn, this misery will be accompanied by others, but other times, you'll be all alone on an island. You might buy a particular stock after it doubled only to see it head south after your purchase, or worse, you will throw in the towel on a lose only to see it double in the next twelve months. Sometimes it can feel as if the market gods are taunting you. The best way to learn how hard investing can be is to do it for yourself. The second best way, which is the purpose behind this book, is to examine the biggest mistakes committed by the world's most successful investors. From Jesse Livermore to Warren Buffett to Jack Bogle, every investor that has experienced success has experienced equal part failure. There are errors of omission, Buffett and Munger not buying Walmart, and errors of commission, Stanley Druckenmiller buying tech stocks as they reached their peak in early 2000. This book aims to help the reader relate to some of their blunders and understand that temporary setbacks have knocked on all of our doors. All investors, from Peter Lynch to the average Joe, are hard-wired with human emotions. We're risk averse, we anchor to our purchase point, and we're all manipulated by hindsight bias. And when we experience failure, usually it's self- inflicted, which makes dealing with it objectively a very daunting task. Difficult as it is, we must figure out how to prevent previous mistakes from interfering with future decisions. People typically strive to replicate success. Kobe Bryant studied Michael Jordan and Paul Tudor Jones studied Jesse Livermore. This makes intuitive sense. Others take a different approach and study stories of failure and try to avoid whatever it is that tripped that person or company up. Like Charlie Munger said, “Tell me where I'm going to die so I never go there.” This book takes a different angle altogether, it focuses on the most successful investors' failures. The reason is not so that we can say, “Oh, this didn't work, don't do that,” but rather so that when we do make a mistake, we recognize it for what it is, a part of the game. Perhaps like no other endeavor, learning to invest can only be done through practice. You can no more learn to invest through reading a book than you can read about heart surgery and perform a triple bypass. You just have to do it over and over and over again. This is not a how-to book. If there is one takeaway, it's that investing is extremely difficult. You will make mistakes. You will repeat them. You will discover new ones. And just when you think you've got it all figured out, the market will humble you once more. It is imperative that you take this in stride, that you don't let these molehills turn into mountains. Once your brain gets poisoned with negative thoughts, it's very difficult to disinfect. The most important thing successful investors have in common is worrying about what they can control. They don't waste time worrying about which way the market will go or what the Federal Reserve will do or what inflation or interest rates will be next year. They stay within their circle of competence, however narrow that might be. Warren Buffett said, “What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know.” I hope you enjoy reading this as much as I enjoyed writing it. Michael Batnick CHAPTER 1 Benjamin Graham There Are No Iron-Clad Laws In my nearly fifty years of experience in Wall Street I've found that I know less and less about what the stock market is going to do but I know more and more about what investors ought to do; and that's a pretty vital change in attitude. —Benjamin Graham In 200 years, nobody will remember Bill Ackman's crusade against Herbalife. John Paulson's bet against the housing bubble will be long forgotten. Charlie's Mungerisms will be relegated to the dustbin of the twenty-first century. Great investors come and go, and most of the ones featured in this book will be lost on future generations. But if I had to put my money on one name that will stand the test of time, it's Benjamin Graham. The Dean of Wall Street, as he was known, will be remembered forever because his teachings are timeless. The lessons he provided in his seminal work, Security Analysis, are just as relevant today as they were in 1934 and will be 200 years hence. The passage of time won't change human nature or the fact that “in applying analysis to the field of securities we encounter the serious obstacle that investment is by nature not an exact science.”1 As gifted as Graham was in mathematics, he understood that the laws of physics do not govern security analysis. It's difficult to overstate how many trails he blazed. Jason Zweig wrote, “Before Graham, money managers behaved much like a medieval guild, guided largely by superstition, guesswork, and arcane rituals.”2 Ben Graham is to investing what the Wright Brothers are to flight, and just as their names will be forever linked to the airplane, so will Graham's to finance. Graham understood what few did at the time – that the stock prices quoted in the newspaper and the underlying value in the business are not equivalent. Sticking with the Wright brothers, Graham wrote: In the Wright Aeronautical example, the earlier situation presented a set of facts which demonstrated that the business was worth substantially more than $8 per share…. In the later year, the facts were equally conclusive that
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