I don’t think it’s unfair to say that most of us living here in Asia have grown up in a society that frowns at mistakes. If we come home from school with a poor report card filled with D’s and F’s, we can be prepared for a tongue-lashing from our parents. At work, we’d also get reprimanded by our bosses if we make mistakes. But, making mistakes is how we learn and improve. That’s especially so in investing. Not even the best investors can avoid making errors. In fact, Peter Lynch, the legendary ex-manager of the U.S.-based Fidelity Magellan fund,…
I don’t think it’s unfair to say that most of us living here in Asia have grown up in a society that frowns at mistakes.
If we come home from school with a poor report card filled with D’s and F’s, we can be prepared for a tongue-lashing from our parents. At work, we’d also get reprimanded by our bosses if we make mistakes.
But, making mistakes is how we learn and improve. That’s especially so in investing. Not even the best investors can avoid making errors.
In fact, Peter Lynch, the legendary ex-manager of the U.S.-based Fidelity Magellan fund, once said that “In this business, if you are good, you are right six times out of ten. You are never going to be right nine times out of ten.”
Mistakes: they’re part and parcel of investing
In investing, as it is with running a business, we are constantly dealing with imperfect information. Yet, we have to make decisions based on the limited information that we have. The problem’s compounded given the fact that there will always be things that are out of the control of our own hands or that of the companies we’re invested in.
Here’s a good example. Anyone analysing marine engineering firm Sembcorp Marine Limited (SGX: S51) at the start of 2014 may have easily concluded that the company can be considered one of the best builders of jackup rigs and liftboats that are used in the oil & gas industry.
In addition, the company’s net order book of S$12.3 billion at end-2013 could also be considered a source of strength especially when we account for the fact that the firm’s annual revenue in 2013 had ‘only’ been S$5.53 billion.
But, it would have been nigh impossible for anyone to have predicted that the price of oil would plunge by more than half from mid-2014 to today. The fall, which is not within Sembcorp Marine’s control at all, has hurt the company’s business, with its revenue and profit in the first-quarter of 2015 falling by 2.4% and 13.6% year over year, respectively. In addition, its order book had also fallen to S$10.6 billion.
The fall in the price of oil has been a big driver in causing the company’s share price to sink by one-third over the last 12 months.
Don’t be too hard on yourself
Sembcorp Marine’s experience serves as a good reminder that we should prepare ourselves for mistakes when we start investing.
Don’t be too hard on yourself when you do make errors. It’s important that you’re not too caught up by it. If you are not making mistakes, it means that you might not be trying hard enough.
We spend time and effort to find individual companies to invest in because we want to achieve results that are superior to what can be delivered by the market. Therefore, we have to find companies with bright futures or firms which are selling for dirt-cheap prices that represent great value.
The former group, fast-growing and dynamic firms that can clock in sustainable rates of growth that are far higher than the economy’s over the long-run, will be a space that’s filled with unknowns.
Meanwhile, the latter area is populated by companies that are in temporary or permanent (sometimes near-permanent) distress; there’s always the danger that we fill our portfolios with companies that are in a prolonged state of decline.
When there are many unknowns in our investing process, there will be mistakes waiting for us. It is okay though, to commit them, so long as you can live to fight another day and learn from each mistake so as to avoid repeating them again.
Committing mistakes is just a part of the investing process. It may be uncomfortable to deal with if you are new to investing. But, don’t be too hard on yourself. Enjoy the process and most importantly, learn from your mistakes.
As long as we are able to keep learning, our future will always be brighter than today.
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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 writer Stanley Lim does not own any companies mentioned above.