How to Recover From Your Investing Mistakes

There will be times when the shares we own head south despite our best efforts in analysing each investment prior to a purchase. In fact, each investor is likely to have his or her own fair share of errors made during the course of his or her investing lifetime.

Right now, a big topic in the investing world is the price of oil falling by more than half in the space of six months since mid-2014. That sharp decline in the commodity’s price has resulted in some serious collateral damage. We can take the rig builders like Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd  (SGX: S51) for instance; the duo has seen their shares go down 24% and 29% respectively since the start of 2014.

At first glance, the share price drop for both companies may suggest that an investor who bought into them prior to the oil price collapse had made errors in the investment. However, like any good Foolish investor, we shouldn’t jump to conclusions based on first impressions. Let’s go a step further to understand the “mistake” first.

Was it a mistake?

To recover from a mistake, we should first find out if a mistake was made in the first place. This is where a chart in James Montier’s book, Value Investing – Tools and Techniques for Intelligent Investing, can help:

Good Outcome Bad Outcome
Good Process Deserved Success Bad Break
Bad Process Dumb Luck Poetic Justice

From Montier’s view, the investment process and the resulting investment outcome are two separate things. We can have a good investing process, but sometimes things beyond our control can give us a bad outcome.

Although we would like to believe that we foresaw the drop in oil, in reality, I reckon that few could have predicted the actual magnitude of the fall in oil prices ahead of time. Furthermore, oil prices are outside the control of the private investor. As such, it may not be fair to label Keppel or SembCorp Marine’s share price declines as an error.

What we can do about it

The next step is crucial: We should be using our investing outcomes (“a share price drop”) to improve our investing process. We should not use the outcome to judge our investing process. Sure, shares of Keppel and SembCorp Marine have gone down and it’s tough to swallow. But if we waste this opportunity to learn, we may be destined to repeat it again.

This brings me to the questions to ask ourselves: Does oil and gas companies belong in our “too hard” pile? Did we factor in the inherent volatility of oil prices in our investment thesis? If so, should we seek a larger margin of safety in the future? Or, should we just stick to companies with strong balance sheets that can weather the storm? All these thoughts may lead the Foolish investor to use the outcomes to design a stronger investing process for the future.

Foolish take away

As investors, we can be obsessed with investing outcomes. When the price of a share we own goes up, we think we’ve made the right decision. But when it goes down, we think we made a wrong choice. The trouble is we forget that the movement of a share’s price is mostly beyond our control.

When it comes to recovering from investing mistakes, the best Foolish answer lies in improving our investing process for our future decisions. If we can do that, we may just limit our investing errors in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.