In investing as in many other things, people strive for perfection. Yet as you gain experience managing your portfolio, you'll realize that you can't get every call right. But that doesn't have to hurt your overall results.
For some guidance on dealing with mistakes, it's helpful to look at some of the world's best investors. Their track records have plenty of blemishes on them -- yet those mistakes haven't stopped them from achieving strong performance over the long run. In fact, many of them would argue that those mistakes have helped them -- by teaching them hard-earned lessons that ended up making them a lot more money in the future.
The Oracle's blunders
Warren Buffett has had a bad year.
With Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) huge float available for investment in stocks, Buffett put his expertise into overdrive near the top of the tech boom in 1999. Given up for dead by many pundits, Berkshire maintained its stable of old-economy stocks -- just before technology started to crumble. Buffett held onto shares of American Express (NYSE:AXP) and Wells Fargo (NYSE:WFC) for years, seeing strong gains.
But now, those and other stocks have produced big losses for Berkshire. More recent investments in ConocoPhillips (NYSE:COP) and Kraft Foods (NYSE:KFT) have also produced losses for the company, while longer-term holdings have seen much of their gains disappear. Even Berkshire's preferred stakes in Goldman Sachs (NYSE:GS) and General Electric have come under fire.
Does that mean that Buffett has finally lost his touch? More than a few think it's possible -- but I disagree.
Forget about perfect
At times like these, it's easy to cherry-pick particular time periods or stock picks that have gone wrong. That's what Jim Cramer went through recently -- from the unlikeliest of sources, Comedy Central's Daily Show host Jon Stewart -- as Stewart pointed to all sorts of bad advice that Cramer gave on his show.
And it’s true that some of your picks will turn out to be bombs. If you think you have to avoid every single bad move, then you should give up right now -- because it's not going to happen. Consider:
- In our Motley Fool CAPS investing community, even the best performers have only about 80% to 90% accuracy -- and that's defining accuracy not in terms of making money but only in beating the market, which has been much less difficult lately than trying to make an actual profit.
- During 2008, out of roughly 3,000 stocks tracked in the Russell 3000 Index, only about 13% managed to eke out even the tiniest of gains.
Given those odds, you simply can't keep yourself from losing money from time to time. The secret, though, is how you handle those mistakes.
Minimize your losses
To keep your mistakes from having a disproportionately large impact on your overall investing results, there are a few things you should keep in mind:
- Prune your losers. Many people hold onto their losing stocks in the hopes that they'll rebound. But while that can be the right move if you still believe in the company's prospects, extended drops can also mean that you've overlooked some key weakness within a company that others have picked up on. Take a closer look before you decide to hold on.
- Have a sell rule. It's important to know under what conditions you'll automatically sell a stock. For some, it's a fixed drop in price, although that can sometimes lead you to make even bigger mistakes. A better rule is based on weak financial statements or business growth. Whatever your rule, stick to it -- and make sure you have one in the first place.
- Don't second-guess yourself. After you sell, you'll be tempted to buy back in -- especially if share prices start going up soon thereafter. Yet while sometimes changing your mind twice is justified, more often than not, you'll face exactly the same questions down the road.
Dealing with mistakes is the hardest thing an investor has to learn. But they're inevitable, so make the effort to educate yourself -- in the long run, it'll make you as much money as your biggest winners.
For more on investing in any market, read about:
- Is the next Great Depression upon us?
- More on what the Oracle of Omaha's doing now.
- You should buy the cheapest stocks around.
