"Drama is based on the Mistake. I think someone is my friend when he really is my enemy, that I am free to marry a woman when in fact she is my mother, that this person is a chambermaid when it is a young nobleman in disguise, that this well-dressed young man is rich when he is really a penniless adventurer, or that if I do this, such and such a result will follow, when in fact it results in something very different. All good drama has two movements, first the making of the mistake, then the discovery that it was a mistake." -- W. H. Auden
An investing life is another thing based on mistakes. After all, none of us jump into it without making some blunders. Warren Buffett and Peter Lynch have demonstrated occasional imperfection. So have Fool staffers -- and you can read about our bone-headed moves in our "When Fools Were fools" features (scroll down a mite to see the installments).
Fool portfolios have also erred. (Check out our list of discontinued portfolios, featuring the lessons we've learned from them.) It's perhaps not so surprising that we should be open about mistakes. After all, as a clever anonymous person once noted: "Doctors bury their mistakes. Lawyers hang them. But journalists put theirs on the front page."
Within each of the investing strategies we write about, there are always a bunch of things that we can think about, things we can improve on, mistakes made, and lessons learned. Observing the Rule Breaker Portfolio over several years now, I've learned, among other things, that:
- Buy-and-hold is better expressed as buy-to-hold. Aim to hold for the long term, but if you lose faith in a company, it's better to sell than to hang on.
It's important to try to sell at the "right" time, as best as that can be determined.
Jeff Fischer recently noted that the Rule Breaker selling strategy leaves a little to be desired. He also asked you, our community, for suggestions for the strategy and portfolio. As might be expected, we received a bunch of good ideas:
- Heihojin suggested that we "acknowledge that the price really does matter." This is a terrific point -- and relates well to a selling strategy. Our strategies have attributed different degrees of importance to valuation.
I am torn when considering valuation and Rule Breaking. Price clearly matters. Imagine that, after holding for many years, you sell your shares in the Butterfly Ballot Co. (Ticker: OOOPS) for $89 each. The return on your money unavoidably depends on the price you paid for the stock. If your cost basis (adjusted for any splits) is $10, your ultimate return is 790%. If you bought at $55, your return is 62%. Quite a difference, no? If you bought the shares at $121 each, then you'll have a loss of 26%.
But, while price -- and therefore, valuation -- does matter, with Rule Breaker companies in particular it can be awfully hard to evaluate. Valuation (figuring out proper prices) involves many assumptions and estimates. Two smart people can easily come to different conclusions on any given stock's proper valuation. Compounding the matter is the fact that Rule Breaker companies tend to be growing very quickly and their future performance is uncertain and hard to estimate.
Here are pointers to a few (of many) other solid posts making good suggestions or addressing perceived mistakes:
- Aflagg suggested an "'Irrational Exuberance' test. Maybe a checkup on the PEG and Price/Sales ratios."
- Albaby1 suggested that we "actually apply the [darn] strategy," pointing out that all our criteria weren't met with some Rule Breaker purchases.
Overall, it's clear that mistakes have been made in our Rule Breaker Portfolio. (Excite@Home (Nasdaq: ATHM), anyone? Down 79%. 3dfx Interactive (Nasdaq: TDFX)? Down 60%.) And they'll continue to be made. An overall goal, though, is for successes to significantly outweigh errors. Alongside that is the necessity of learning from our mistakes. It's naturally frustrating, even tragic, to lose a bundle of money on an investment. But if we learn valuable lessons in the process, the lessons can help us avoid making the mistake again and can help us make more money in the future.
Please learn from our mistakes, too! That's what our strategies and portfolios are here for, to teach by example, through successes and blunders, questions and discussion. Consider dropping in on our discussion board to share any lessons you see in our successes and errors.
In preparing this article, I was looking for a snappy quotation to use up top. I found a lot of good ones that offered a bit of food for thought (or at least a chuckle). So, here's a brief quotable interlude:
"We often discover what will do, by finding out what will not do; and probably he who never made a mistake never made a discovery." -- Samuel Smiles
"An expert is a man who has made all the mistakes which can be made in a very narrow field." -- Niels Bohr
"Mistakes are a fact of life. It is the response to error that counts." -- Nikki Giovanni
"A life spent in making mistakes is not only more honorable but more useful than a life spent doing nothing." -- George Bernard Shaw
"Aristotle could have avoided the mistake of thinking that women have fewer teeth than men, by the simple device of asking Mrs. Aristotle to keep her mouth open while he counted." -- Bertrand Russell
Finally, here's one last quotation that has some application to our friend the Rule Breaker Portfolio:
"America is the most grandiose experiment the world has seen, but I am afraid it is not going to be a success." -- Sigmund Freud
It's interesting to me because some people are looking at the portfolio's ugly 2000 performance and declaring the strategy devoid of value. Others, including us at some points, were doing a heck of a lot of rejoicing during the portfolio's rosier days -- seemingly assuming that the strategy was a proven long-term winner. The truth, though, is that it's premature to come to any kind of final assessment. This jury should remain out for quite some time.
Was Freud wrong in his call on America? It sure seems so. Here we are, after more than 200 years, still doing well. True, our system of government can apparently still surprise us, such as with "Chadgate." It's still working, though. After 500 more years, who knows -- perhaps Freud will have been proven right. The problem with Freud's statement, as well as with dismissals or trumpeting about the Rule Breaker strategy, is that it all depends on the time frame you're talking about. America could be a winner for 2,000 years, but might implode after that. Rule Breaking, with the incremental improvements we make along the way, might prove to be very effective over decades. Or not. It's here for your consideration, though. Perhaps you'll find a small place for it in your portfolio, perhaps not. The choices, the decisions, are yours.
Just be sure to learn from your mistakes -- and ours.
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On a lighter note, eBay (Nasdaq: EBAY), one of our stocks that has looked like a mistake to date, reported fourth-quarter results that surpassed expectations yesterday. Rex Moore covered the story for Fool News. eBay continues to impress us with its strong results. We're happy to own it.