Investing is hard

17May06

Investing is hard. Don’t let anyone tell you otherwise. Especially those who clog up your television dial with infomercials for their ‘easy trading’ seminars. Even the most accomplished investors, whatever their process, have trades that test their faith. Owning up to a poor trade, or methodological problem is a great challenge.Brett Steenbarger at TraderFeed departs from his usual quantitative work to highlight two related issues that “..lie at the heart of at least half of all the problems I see among traders.” They include:

  • Quantum leaps in trading size; and
  • Departures from prudent risk management.

We recommend traders read the piece and keep them in mind when reviewing a piece by Marc Lichtenfeld at TheStreet.com. In it he reviews the process by which one of his own trades went awry.

But when I trade shorter term, I’m susceptible to a lot of the problems that affect many traders — notably, allowing my emotions to get in the way and ignoring my own rules. Despite following the markets all day and having access to some of the best investing minds in financial journalism, I find myself embroiled in a trade gone bad that I would like to outline for you.

These challenges that face shorter term, technical-type traders can also face longer term fundamental investors. Emma Trincal also at TheStreet.com has an interview with Carl Icahn in which he defends one of his (to-date) losing short sales. While Icahn reiterates the fundamental case against USG Corp. (USG) he is also sitting on a substantial loss. It could very well be the case that Icahn is correct in his analysis, but clearly his timing was early. Only time will tell whether this “stick with it” attitude pays off.This process of revisiting investment errors was driven home in some comments by Charlie Munger. Pat Dorsey at Morningstar.com notes another form of investment error – that of omission.

“The proper thing to do is look back and think what huge opportunities we all missed,” he (Munger) said. “We didn’t scan enough areas looking for opportunities.”Then later in the meeting: “You can miss a lot. As long as you get some, and don’t make monstrous mistakes, you’ll do fine. But you should constantly review mistakes of omission.” Munger related the story of fund manager Chris Davis’ wall of shame–on which he posts the certificates of stocks that represent his worst losses–and mentioned that everyone should have a “wall of shame squared,” reviewing all the things “you could have done if you’d been a bit more rational.”I couldn’t agree more. As Munger put it simply, “You will be a better investor if you do this.”

Even the most accomplished investors make mistakes. The challenge is to turn those losses (or missed profits) into a meaningful learning experience.

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