Big Mistakes: The Best Investors and Their Worst Investments

163 Pages·2018·0.94 MB·English

by  Michael Batnick

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
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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.
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Library of Congress Cataloging-in‐Publication Data:
Names: Batnick, Michael, 1985-author.
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