Every year in January, I look back at the prior year to assess the various errors, mistakes and bad calls that I made in the course of running an asset management business.

I make a list of these mistakes, analyze why they occurred, and what I can do to avoid similar errors in the future. This is my 4th go round, and I have made ‘fessing up a key part of my process (my previous mea culpas can be found for 2009, 2010 and 2011).

This is not simply a rite of contrition — in this business, you must expect to be wrong. Owning up to your own mistakes is the only way to a) get better; b) admit that failure is part of the investing process; c) stay humble.

2012 was a tough year for many, despite a robust set of gains for equities. The S&P500 index returned 13.4%, plus another 2%+ for dividends = >15% for 2012. Lots of managers missed this benchmark (My benchmark is a total return 60/40 model).

This is not about absolute performance, but rather the process that impacts those outcomes.

Let’s get to it:

1) Tactical Moves: 2012 was not the year that tactical was an especially successful formula. (Many Tactical Asset Allocators under-performed). A few of my tactical moves worked out, but more than a few did not. There are costs and taxes associated with being tactical when you nail it perfectly, and opportunity costs when you are wrong. Tactical led to excess cash at times throughout the year, and that impacts performance.

Solution: My goal in executing tactical moves should not involve avoiding 5-10-15% retracements, but should aim to steer clear of 25% plus moves to the downside. Reduce tactical moves by tightening metrics for evaluation.

Use tactical more sparingly – it should be a 2X per decade shift, not an annual event.

2) RE/Housing Market: I doubted, and continue to doubt, the recovery in the Housing market. I expected foreclosures to tick up, the REO overhang and the underwater owners to continue to weigh on the market.

I was wrong.

Instead, the market stabilized, and prices rose.

The Fed’s Operation Twist managed to drive rates even lower than they were, increasing purchasers’ buying power. Mortgage settlements have given banks more flexibility in dealing with REOs, and appetite for Homes as part of the American Dream is still alive and well.

Solution: I am still aware of the inorganic nature of this improvement, but the key takeaway is a) US housing market down 35% eventually stabilizes; 2) do not under-estimate the ability of a determined Central Bank to impact any specific market it chooses.

3) JP Morgan: I have been critical of the TBTF money center banks that have opaque balance sheets, but a balanced portfolio has some exposure to financials. Our solution was to own companies with cleaner balance sheets and less credit risk: Think Visa and Berkshire Hathaway. But Jamie Dimon’s so-called “Fortress Bank” suckered me in, and 6 months later the London Whale took all of our profits in the position away and then some.

Solution: More courage of my convictions. Find alternatives to garner the exposure to a desired sector, and avoid owning what you cannot possibly understand potential risks. Be aware of the trend but do not accede to the crowd.

4) Facebook: After berating Facebook for the better part of 2 years on valuation, fabricated metrics, and a weak business model, I began to wonder if everyone else was right and I was suffering some of my own confirmation bias. These self-doubts led me, as the stock came in on the day of the IPO, to buy Facebook for aggressive portfolios. The good news our is stop loss discipline was the IPO price, and I kicked it before the day was over.

Solution: Have the courage of your convictions. Yes, I owned Facebook for less than a day, but I never should have bought it until it was closer to my valuation of $12-15. If sometimes you have to miss a move because there are warts on it that might blow up, so be it. (Similar to JPM)

5) Global Macro: One error I made this year was allowing macro views to trump our more pedestrian day-to-day investing approach. We all love to look at the really big picture, but in 3 out of 4 years it has not been a good way to make money. This investing approach does work well at major turning points, but the rest of the time it creates excess activity and potential for loss.

Solution: Asset allocation has proven itself over time. Stay with it; do not allow yourself to be distracted by the noise.

6) Individual stocks: In addition to broad asset classes we own, we also buy individual stocks that we have a high degree of confidence in (these are only for not conservative accounts). Some have been home runs (V, BRK, CVX) others have been losers (JPM, FB, COP).

However, all individual stocks carry additional risk that you do not get with an index. While this has not hurt our performance, it has increased our volatility and decreased our Sharpe ratio.

Solution: Use individual stocks more sparingly to fill in holes in exposure.

7) Dealing with Crappy People: Having a public persona means you have to deal with people who as a private citizen you normally would not. Writing in public brings about all manner of haters, jerks and creeps. My naturally combativeness leads me to instinctively engage with these folks on their level.

Solution: Twitter battles, flame wars, comment headaches — all waste time and emotional energy.  There is no obligation to interact with jerks. Disengage from them. Block the Twitter haters, ban the nasty commenters. Distinguish between legitimate debate and ideological silliness. Constructive comments and legitimate disagreements are very different than ad hominem attackers. There is no requirement to publish the comments of liars or haters.

If I want to reduce the level of cynicism and negativity in my life, it helps to get rid of the carriers of that emotion.


Those are the big ones for this year (there are more little ones, and some personally embarrassing items that missed the cut off).

Come back in 12 months for a whole new set of different mistakes.

Category: Apprenticed Investor, Philosophy, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

50 Responses to “Mea Culpas for 2012”

  1. TLH says:

    You want (7) to exist. I always think they are on the other side of the trade. Without them, you would not make as much money. You just do not want to become one of them.

  2. Orbea says:

    On the Tactical Moves Issue
    I hink that there have only been a few times in the last 100 years when the market had a significant decline (25%) without there being a recession. The times I can think of are: the start of WWII, the Cuban Missile Crisis, the 87 Crash, and the 2011 EU Bank Crisis. So, basically what you are saying is that you are only going to be in the recession prediction business.

  3. PeterR says:

    Number 7 (crappy people) reminds me of a more general rule:

    Give up your islands of mediocrity.

    We all take refuge during our journey on islands meant to sustain us, but which lose their oomph over time. Moving on is usually delayed and the inertia of staying put grows.


  4. Stuart Douglas says:

    One thing I took away from this that I have been applying in my personal life since late last year.

    “If I want to reduce my own level of cynicism and negativity in my life, it helps to get rid of the carriers if that emotion.”

    Most definately. Put those FB friends that are a drag on “hide”, you don’t have to unfriend them, just get them out of your feed. Block the twitterers that are all negative BS. When you start not even glancing at all of that happiness you mood immediately improves.

  5. Liquidity Trader says:

    You are a braver man than I.

  6. It is a painful, but necessary part of the process.

    After I started doing this I was gratified some years ago to read Ray Dalio’s philosophy, and to learn that something similar was part of his process. You could do a lot worse than imitating him.

  7. JoseOle says:

    Fleshing out your mistakes is admirable, making you more than entitled to tell us what you got right, btw.

  8. JimRino says:

    I called the housing stabilization! ( Three times. )

  9. Conan says:

    Barry I appreciate your sincerity and openness to publish this. It has given me much food for thought, thanks.

  10. [...] Barry Ritholtz at the Big Picture remained skeptical of a housing recovery but just this morning, he surprised me (and I’m sure many others) with one of his Mea Culpas for 2012. [...]

  11. Seaton says:

    Thank you for a fearless, bald, open reflections. Couldn’t agree with you more about JPM, which is why (since I got burned by BAC, no thanks to Lewis) I’ve avoided financials on a “TBTF” scale. Smaller, local banks/regional, etc., more my speed—but no more than 5% of portfolio. Similarly, you have inspired and continue to remind me to do the same.

    Your #7 is so right-on-target. V.P. Hubert H. Humphrey said it best: The right to be heard does not automatically include the right to be taken seriously.

    So similar to Twain’s it ain’t what you know that gets you into trouble, it’s what you know that just ain’t so.
    Lastly, you can’t win enough to reach happy, but you can lose enough to become depressed. I’m aiming for the first more and more, and reducing my exposure to the latter more and more. Your postings are routinely spot-on, not the trash / noise that’s just too prevalent out there. Thanks again.

  12. Barry, you have the makings of a good investor. Your humility has really impressed me. Such realism and humility should translate in the long run in good performance.

    Well done to reduce negativity.


  13. czyz99 says:

    Avoiding negative energy and the Fed is pretty damn powerful. Live it.

  14. Dima says:

    Thanks Barry,

    Your openness and honesty are admirable. I have new respect for you. To admit one’s mistakes is the path of progress. I’ll have to add “meeting Barry Ritholtz” to my list of important things to do.

    Best regards dude!

  15. Hearts says:

    Barry, a couple questions.

    1. How do you know you are correctly measuring the process and not the outcomes? JPM would likely not be on your 2012 list had the whale tale not occurred.

    2. Can you provide us a list of specific investments in your universe of broad asset classes for our future investment decisions? I assume it is mainly ETFs.


    BR: The Whale revealed the flaw in our thinking — that we could safely own a money center bank with an opaque balance sheet an lauded CEO. When you do not lose money on a trade, it is far less revealing than when you do. Not losing money may mean only that you got lucky, not that you got it right.

    Hence, my focus on process, not outcomes.

  16. jbay says:

    7) Thanks for all your posting and keep doing what you’re doing :). I enjoy reading and try to avoid commenting for that exact reason. A good friend of mine once told me after I had complained to him while driving, “a great place to complain… no escape routes… :)”, saying “jbay, everyone has an opinion and everyone has an ass whole. And you know what jbay… they both stink!”

    Cheers to a New Year and may it be profitable for the both of us.

  17. CSF says:

    Great post, Barry. Numbers 1 and 5 have me written all over them. My resolution for this year: stop trying to predict the economy and the market, and focus more on price and allocation.

  18. robertso2020 says:

    Thanks Barry. My biggest mistake this year was “tax management”. All my gains (mostly individual stock picks…not a result of a good market call) were in taxable accounts and mostly short-term and all my losses were in my non-taxable accounts. What turned out to be a decent year of performance wasn’t that great after tax. Lesson Learned: I’m not sure…need some advice.

    It was quite discouraging because I put a lot of thought into tax management a couple years ago and I absolutely failed miserably. Additionally, I had a similar view of residential real estate and I held off buying a house last year. Now I’m looking at an even tighter market going into selling season this year.
    Lesson learned: Never underestimate Americans focus on monthly payments vs. Asset Value

  19. Terry says:

    BR–Thanks for the candor and the insights. Useful thoughts here for those of us who are simply trying to manage our own portfolios.

  20. wannabe says:

    Number 4 surprised me because I remember telling someone who got burned, “I knew to stay away from Facebook by reading Ritholtz, you should too”. LOL. I’m pretty sure you never told us about adding it to aggressive portfolios, what you posted here played out on the big screen, as far as I can tell.

  21. rj chicago says:

    BR says: “If I want to reduce the level of cynicism and negativity in my life, it helps to get rid of the carriers of that emotion.”

    Hey Barry – F….U!!!!
    Kidding – :)

    I really enjoy your blog and have for the last several years – keep up the good work. I have learned ALOT from your posts and even though I don’t trade or deal in the markets all that much (I am an architect!!) I find that after reading so much of what you post I can have real discussions with folks who make their living in the markets.

    I do have to still disagree with your ‘makeup’ on housing – it is still very, very slow in the construction market – design firms are still hurting big time and many younger professionals have opted out of architecture and engineering as a result. This is gonna be a long hard slog to repair – 2013 will be a tell but I suspect things will improve once the pin heads in D.C. get of the pot and start to really deal with the debt and spending – they are killing us in the private side of the equation.

  22. lucas says:

    RE: Housing. There are many communities where housing is still over-priced relative to the wages of the residents. For example, Santa Barbara, CA is the fourth most unaffordable city. Sellers price their houses based on what they could have gotten if they had sold in 2006 and advertise that the house is listed at a discount, instead of thinking of the gain relative to their cost basis. Although, in most towns wages do pay for houses, in SB, out-of-towners, flush with cash and nowhere to put it, outbid residents who have saved that down payment. Or they buy fixers which require 100% cash because no bank will lend on such dilapidated property.

    Then they make it barely habitable and put it on a rental market where 65% of residents are renters. They charge exorbitant rents, tootling that the rent must be “fair” because tenants are signing the leases, ignoring the compulsion factor. They deride tenants as “that renting class” which could buy if they did not smoke and drink their money, ignoring the fact that the high rents make it harder for tenants to save that down payment.

    I do not see how this situation is sustainable. What happens when the Fed lets interests rates go up? Will not house prices have to come down to a natural bottom? It seems the current “stabilization” rests on a dubious equilibrium. People say house buyers in 2006 foolishly paid too much. SB buyers seem just as foolish 2012. Even worse, buyer’s agents do not actually look out for their client’s interests. The system, where buyer’s agents, get a piece of the selling agent’s commission creates an irresistible conflict of interest. The whole system needs to be reconfigured in a way that rewards buyer’s agents for actually taking care of their buyers. I would like to hear suggestions for incentivizing buyer’s agents.

  23. rj chicago & lucas:

    I am not a Housing Bull — I am just admitting that, relative to what I thought heading into 2012, the Housing market did much better than I expected.

  24. constantnormal says:

    … “Come back in 12 months for a whole new set of different mistakes.”

    I sincerely hope you can accomplish that.

    So few of us do, making most of the same mistakes repeatedly. I have a lot of trouble learning to make different mistakes.

    We make the mistakes that we make, not randomly, but due to aspects of our psychological construction. And the older one gets, the more difficult it is to change that.

  25. constantnormal says:


    … “outcomes” are what defines whether a process is a success or not.


    BR: Not true. You can get a good outcome from a poor process. Ever hear of Luck or Randomness?

  26. James Cameron says:

    > These self-doubts led me, as the stock came in on the day of the IPO, to buy Facebook for aggressive portfolios. The good news our is stop loss discipline was the IPO price, and I kicked it before the day was over.

    More than surprised to read this . . . especially on the day of the IPO! :)

    That said, I think it speaks very highly of you – and your business practices – that you discuss these mistakes in a public forum. This also almost happens to be great marketing IMO – who doesn’t want an honest money manager who rigorously scrutinizes and learns from his/her mistakes. We all make mistakes . . . it’s what we do with them that really matters.

  27. wally says:

    Just a comment on the ‘housing’ part (and not meaning to pile on the criticism, but…) : I hope you recognize that you were also out of your field of expertise. You used some simplified concepts ti indicate that the ‘overhang’ would be an issue. But ‘overhang’ in housing is not like a similar situation in, say, equities. There are two differences. First, there is continual growing demand for housing whether it is visible in the stats or not. Our population is still growing. And second, the quality of individual homes is a huge factor – a lot of those repossessed homes will NEVER sell in any way that affects the market. They are junk. They are like the seasons-end fashions at Macy’s. Move them out cheap, but they will not affect your sales of top-line products. There is a market for this years $200 jeans even when last year’s $200 jeans are being moved out for $40.
    I think also there is a lack of general understanding of how much the housing recovery will boost the general economy. Housing may have a greater multiplier effect than any other industry.

  28. Wally

    This was based on my expertise, understanding the foreclosure settlement, new REO situation, plus the new private equity in the space.

    Maybe I was early, and one day the chickens come home to roost, but I began in this business as a trader, and early still = wrong on my book.

  29. capitalistic says:

    #7 is the most important. I made that decision to eliminate sources of negative energy – once I did, my business strategy and sense of clarity improved dramatically. Crappy people can ruin your momentum. Yuck

  30. Concerned Neighbour says:

    Everyone is human, BR. I, for one, do not envy anyone in your line of work, what with the extent to which (I would argue) world central banks have heavily distorted markets. We now live in a world where positive is positive, and what used to be considered negative is now considered positive. Who knows how long it can last, but while it does it makes your job that much more difficult.

    BTW, to the individual in another thread who called for banning those commenters who use such terms as “banana republic”, I must disagree. In the not-too-distant past when I studied economics at university, the act of printing money to monetize debt was considered a hallmark of a banana republic. Now I’m not sure if the textbooks have since been re-written and the professors minds “re-educated”, but I remember we used to laugh at this kind of stuff.

    Again, what used to be considered negative is now a positive. Good luck to all that confidently invest in this kind of climate.

  31. Joe_in_Indiana says:

    I am happy you don’t let your ego get in the way of trying to find the right path. I know I try my best at it and it is difficult at a minimum.

    You seem very comfortable with yourself whenever you are giving interviews. Plus you do so with an open and honest attitude. I may not agree with everything you posit, but you do provide a very willingness to hear other viewpoints.

    Thanks for sharing them!

  32. ToddMPeters says:

    AL MVP Miguel Cabrera hit .330 this past season. Nobody bats 1.000. Kudos to you for highlighting your whiffs. Few have the courage to do so.

  33. mbreuter says:

    You actually bought the Facebook IPO! I think I would be less shocked if you wrote that you had left your wife for the poolboy.(And thanks, I made fewer mistakes last year because I began reading your blog.)


    BR: You never saw my poolboy!

  34. Frwip says:

    I need to run the same exercise on a prognostication of my own.


    About a year ago, I predicted a stabilization of housing in nominal prices, which in turn could help unfreeze hypothecation hence credit and bring back some life in that market. But my guess was that inflation adjusted prices would still go down a bit. I need to look at the Schiller-Case and inflation measures to see what actually happened (I haven’t looked at that stuff in months). I was probably too pessimistic.

  35. Greg0658 says:

    mbreuter @1431 .. omg – this site needs a better Carnivore sniffer software :-)

  36. ToNYC says:

    May your fails be fast, and your realization and learning the difference be faster. Keeps you going and the crap falling away.

  37. Eye Wall says:

    Barry, I struggle with this, “2) do not under-estimate the ability of a determined Central Bank to impact any specific market it chooses.” I do not believe in ‘the free lunch’. If this sort of all-powerful central planning was the right model, the USSR should have owned us all but instead they collapsed. What are the consequences here of the Fed’s actions or can they simply do whatever they’d like with no downside?

  38. sparta47 says:

    #1 I’m not so sure you made mistakes. Did you lose money or just leave money on the table?
    We are still in a secular bear market. I think the first obligatiion is to preserce capital.

    Besides a secular bear market there are many big risk both in the US & Globally out there. How do you know ahead of time a 5 / 10% isn’t going to grow to 25 / 35%? Do they ring a bell?

    I don’t know how you did specifically or 2007 – 2009 but I suspect your clients are happy with you if reduce risk in 2012 & avoided a large drop…. Often the idea is too minimize mistakes not maximize risk. It is other people’s money.

    Ignore the trash commentary.

    Keep up the good work……… I wish I was a happy client & not just a happy reader.


    BR: Those trades mentioned lost money — we did pretty okay this year, but could have done better.

    In 2008, running an all equity portfolio, we moved to all cash by mid January, stayed that way most of the year, ended up being down single digits versus an S&P500 loss of 38%

  39. After decades of forecasting, the odd error has come up. For those in this sector, it is good to remember you don’t have to be correct all the time … just more often than your peers!

  40. bear_in_mind says:

    Bravo, Barry, bravo!!!

    I need to tell you that your generous writings, links to articles, books and commentary have greatly contributed to my maturation as an investor. I began adopting the more reasoned approach illustrated by you (and Mebane Faber, etc.) by indexing with cost-efficient ETF’s and having the risk-management discipline to respond to an actual “market meltdown” — while not getting burned by every whipsaw.

    Keep-up the great work and enjoy the long holiday weekend!

  41. TacomaHighlands says:

    Love it, love it, love it.

  42. Richard W. Kline says:

    BR: “There is no obligation to interact with jerks . . . There is no requirement to publish the comments of liars or haters.”

    My truly final comment to a number of toxic timesuckers online has been, “You aren’t worth my time.” Because that is the real tax of such folks. The putative content of the interaction is of no consquence whereas securing your time and attention to their process of wailing and griping is the real point. One has a learned social obligation to interact which such folks exploit ruthlessly and entirely selfishly. —Which breaks the social contract on that, so revoke one’s involvement; that’s the ultimate punishment.

    Time is the currency no power on earth can pay over to you. Realizing that your time is truly your most precious and also most finite asset is in its way the most valuable insight one can have, because it drives so many subsequent decisions regarding _how_ to spend ones time, and what on. So in valuing my time as my true wealth, would I voluntarily pay that over to dweebs, haters, losers, and the damned to have for their own? To no compensatory return whatsoever?? E-a-s-y choice: nyet.

    Spend your time on what’s precious, not what’s trash. You’ll be surprised how the quality of your life improves, if only because you made an overt decision to try for something of worth.

  43. Theravadin says:

    Just a great list, Barry. We all need to make list like this.

    I think the unstated precursor to the list, though, is, be clear on what your investing goals are… well, I know this is always the first piece of advice given to a perspective investor, but the discussion is always about risk/return, and not about bigger picture items, like: are you investing to make money, to support things you believe in, or for thrills and excitement? I’ve come to accept that my motivation is really thrills and excitement, with a little of what I believe in thrown in. Making money is a thrill… but losing it can be too! It’s been extremely liberating… and strangely, it’s a really good way to “keep your head when all around you are losing theirs”. I spent this year doing everything wrong, buying stocks all the way down through 80% collapses, putting my whole pot on a single stock, having no end of thrills, and ended up with outsized wins for entirely stupid reasons. Probably just incredibly dumb luck… but probably also a little bit as result of taking a view, being totally counter to the market, and being patient because I was enjoying the ride.

    So the point of this discussion is, I think there are two other important lists: a list of what you did right because you knew what you were doing, and a list of what you did right even though you didn’t have a clue. This latter list is in many ways the most interesting one, because it potentially leads to unexpected viewpoints on investment, the economy, and human nature. I’d love to hear what you would put into these two latter lists.

  44. yon’ Ritholtz,

    this is, yet, another, Great, way You Lead by Example.

    as others, above, have pointed out..~”This is something We All should Do.”

    personally, not that it much matters at the EOD..

    I was wrong on Point #2, too..for much the *Reason/rationale..

    for some, serious, excuse-making..yon’ QOTD seems apt..

    “The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

    - John Maynard Keynes

    with that, though, one of the things I have difficulty keeping in mind, is..(to borrow from Mencken..)


    “No one ever went broke underestimating the intelligence of the American public.”
    A famous quip commonly attributed to journalist and editor H.L. Mencken (1880-1956)
    Although this saying is often credited to Mencken, it’s actually a paraphrase of something he wrote in his column in the September 19, 1926 edition of the Chicago Daily Tribune. He was discussing the recent upsurge in tabloid newspapers geared toward uneducated readers, including “near-illiterates.” Mencken predicted (correctly) that “journalism of the future…will move in the direction” of the tabloids and noted drily:
    “No one in this world, so far as I know — and I have searched the records for years, and employed agents to help me — has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.”
    Over time, this longer quote came to be paraphrased and misquoted, most commonly in the form “No one ever went broke underestimating the intelligence of the American public.”



    sometimes, it seems that the ‘Cynicism Dial’, too, needs to “go to 11..”

  45. [...] Ritholtz, “Mea Culpas for 2012“; “The Big Picture” [...]

  46. Why You Should Give Yourself Permission to Screw Up

    How does it feel when you make a mistake on something that really matters?

    Is it frustrating? Do you want to scream, to kick something, to slap your forehead really hard? Do mistakes make you angry with yourself?

    Or is it more like fear – do mistakes make you anxious, tense, worried that you are on the fast track to failure?

    It’s small wonder that the prospect of screwing up is met with such dread. Many of us are wary – though not always consciously – of doing things that are unfamiliar or outside our domain of expertise because we might make mistakes. But the problem is, we need to be expanding our skills and knowledge, continuously striving to grow and improve and going beyond our comfort zones if we want to be successful.

    So how can you motivate yourself to approach new challenges with confidence and energy, without fear of making mistakes? The answer is simple, though perhaps a little counterintuitive: Give yourself permission to screw-up.

  47. Michaelinwa says:

    BR: thank you for your continued honest commentary. I’m glad you are learning to take the jerks in stride, because the rest of us would never want to see you leave the blogosphere because of a few nasty people. I’ve learned a lot from you. You add to the world. Stay true to your style.

  48. ravenchris says:

    Yes. Please remain unique.

  49. [...] rose appreciably, gaining ~8% since then. I publicly admitted my error in my annual mea culpas (here and [...]