My Sunday Washington Post Business Section column is out. This morning, we take an expanded look at my annual Mea Culpas, and why investors should expect to be wrong

Here’s an excerpt from the column:

“Why should you make a list of your mistakes? In the investment business, you must expect to be wrong. This ritual forces you to stop lying to yourself about what a great investor you are. In most fields, if you get 3 out of 5 things wrong, your career is in deep trouble. Imagine if a doctor had 60 percent of clients die on him, or an accountant with a 60 percent audit rate.

Investing is more comparable to baseball, where hitting the ball only two out of five times means you are batting .400 — making you one of the greatest batters of all time. (Congratulations — you are Ted Williams!) Understanding this strikeout ratio is just a small part of successful investing. It also helps to have a plan in place so you know what to do when you whiff.

I am frequently — and, on occasion, spectacularly — wrong. But I expect that to be the case. Pretending to divine what stocks will go up or down or where the market will be in three or six months is not only silly, it’s also counterproductive. Instead, I suggest you anticipate errors and be prepared to correct them, quickly.”>

I find this process to be somewhat uncomfortable, but a necessary part of improving as an investor. I was already doing it for a few years when I came across Ray Dalio’s manifesto — and I learned that decades earlier, he reached a very similar conclusion.

 

Source:
Here’s where I messed up. And this is what I learned.
Barry Ritholtz
Washington Post, February 10 2013
http://www.washingtonpost.com/business/heres-where-i-messed-up-and-this-is-what-i-learned/2013/02/08/ed5c97ce-7096-11e2-ac36-3d8d9dcaa2e2_story.html

 

 

Category: Apprenticed Investor, Psychology

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8 Responses to “Anticipate Errors & Be Prepared to Correct Them Quickly”

  1. VennData says:

    We were wrong about the Butler Act.

    http://en.wikipedia.org/wiki/Butler_Act

    Bring back the Butler Act

    Marco “10,000 years” Rubio/ Bobby “Birther” Jindal in 2016

  2. Terry says:

    Couldn’t agree more with this article.

    My problem (& apparently sometimes yours) is how to distinguish betweeen a bad decision promptly to minimize its effects rather than view the investment’s deterioration as a momentary market aberration.

    After 40 years of investing, that is still a problem for me–even why I try to be rational.

  3. ToNYC says:

    Ray Dalio shares Philip K. Dick’s view that “Reality is that which when you stop believing it, it doesn’t go away. The rationality behind it is for history to invent the narrative, not for prediction. Experience is risk, enjoy the falls and pay the tuition relentlessly. Until you can fall safely, you’re not ready to fly.

  4. Bill in SF says:

    “Anticipate Errors & Be Prepared to correct Them Quickly”

    Looks like Makers’s Mark is taking your advice.

    “Maker’s Mark just got a little less stiff. The bourbon brand, known for its bottles sealed with red wax, told customers today that it’s reducing the amount of alcohol in the beverage in order to meet rising global demand.”

    Is this a good thing or a bad thing?

    http://qz.com/52478/makers-mark-waters-down-its-bourbon-to-meet-rising-demand/

  5. catman says:

    I can relate to this. I have been known to bat .850 and lose money because I thought I wa a .999 hitter. Whew.

  6. “Anticipate Errors & Be Prepared to Correct Them Quickly”

    BR,

    Given your, recent, i-view, with Daniel Gross..
    http://www.ritholtz.com/blog/2013/02/the-greatest-triumph-of-the-banking-industry/

    and, seeing..”…I remember both that the Bush Treasury lied as to their intention for the TARP bailout money (disclosed under oath by Kashkari in a hearing on Capitol Hill; they had already decided not to buy “toxic assets” before Congress passed the bill) and that Bernanke was caught pulling system liquidity into the maw of the Lehman collapse while telling everyone he was doing the opposite, never mind his repeated claims that he would not “monetize the debt” yet he has done exactly that. We can also talk about Tim Geithner and the entirety of the FOMC, who knew in 2008 that Turbo Timmy stood accused of passing inside information to the banksters prior ot the discount rate cut in August and yet everyone remained both silent and complicit in that act up until the transcripts were released.

    The number of people who have been charged with lying to Congress and prosecuted over these events? Zero…”
    http://market-ticker.org/akcs-www?post=217337

    Do you think He will “…Be Prepared to Correct Them Quickly”?

    the Error, of course is his not burying, but excising the lede (“It was a license to steal, and its one they have exploited relentlessly.”)
    or, if not that, then leaving his Name on a Piece that had that happen to it..
    ~~
    further, Given the Pic, above, of the dude getting comfortable in the Snow..

    the Idea you’re laying out (in your Post) has to do with Professionalism, yes? not, just, ‘Stock Trading’, right?

  7. Expat says:

    I run trading simulations in all my classes. The students trade over two to three months and have to submit written reports with analysis, updates, and post-mortems. Some of them never bother to go past the requirements and simply fill in the page with drivel. Others use the exercise to examine their motivations and actions, sometimes bringing up earlier reports they wrote. Not many go on to trade professionally and I bet that none of them is still writing down their trades and analyses….but I have hope.

  8. td says:

    This is why TBP is one of my first reads every day….so few in the financial media, old or new, are willing to admit even the possibility of being wrong let alone incorporate their failure rate into their investment approach.