The U.S. equity markets have taken most investors for a wild ride this year. You've probably suffered losses or are at least sitting on losses from your investments.
My advice? Get over it.
If you've been investing for a while, this wasn't the first year you incurred losses. Nor will it be the last.
You can take steps to overcome your losses and avoid taking as many in the future. With this market year nearly over, let's look ahead to see how you can improve your 2008.
Minimize your mistakes
Many people consider Warren Buffett one of the finest investors ever, but even he has made mistakes. You could argue that the original Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) investment wasn't one of Buffett's greatest moments.
The company consisted of an aging textile mill that had poor economic fundamentals and ultimately was shut down. Of course, Buffett's brilliance allowed him to allocate intelligently Berkshire's capital into other businesses and turn it into the massive holding and insurance conglomerate it is today.
This leads me back to my first point: It's OK to make to mistakes, but not too many because too many can kill you. Look no further than this year's credit and lending mess to see what I mean. Several businesses have gone under or are impaired permanently because of the widespread use of financial derivatives, particularly mortgage-backed securities. And if it wasn't for their sheer size and diversified financial activities, companies such as Merrill Lynch (NYSE: MER) and Citigroup (NYSE: C) could have suffered even more than they already have.
Always exercise due diligence
All too often, investors can't resist the urge to buy a stock simply on the news that someone else did. In fairness, I am a big advocate of analyzing the portfolios of investing marvels such as Mohnish Pabrai, Marty Whitman, Bruce Berkowitz, and Michael Price. These guys have demonstrated that over the long haul they can outperform while avoiding many mistakes. However, investors need to realize that although the portfolio holdings of great investors are an excellent source of ideas, they are not buy lists.
Recently, I wrote about a study showing that buying Buffett's investment picks after they were disclosed over the past 30 years would have generated market-beating returns. I doubt, however, that many investors could have actually generated those returns even if they did copy Buffett, because most investors would not have held on to the investments for as long as Buffett has. Washington Post (NYSE: WPO), in which Buffett invested around $10 million the 1970s, is now worth more than $1 billion. Yet the Post declined after Buffett's initial investment, and most investors, without exercising due diligence, would have probably sold after the first hint of trouble.
As Ben Graham once prudently stated: "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." Without exercising due diligence, investors cannot be confident in their investment decisions, because they have no sound basis with which to hold their ground.
Learn from your mistakes
Investing is a strategy, a series of steps that build on themselves. When you perform due diligence on a business, you have created a source of information that becomes increasingly valuable through the course of the investment and beyond.
You also establish a way to step back and re-examine a previous investment, so you can determine what went right and what went wrong. That's important, because the successful long-term investor is not the one who picks the winners, but rather the one who learns from the losers and avoids the same mistakes. When approached prudently and intelligently, investing becomes an activity involving zero stress.
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