Everyone Makes Mistakes

May 06, 2010 1:58 PM ETCOP
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Contributor Since 2010

Yee S. Ong, CFA is the author of "The Strategist's Mind: The Art of High Return, Low Risk Investing" and the principal of YSO Capital Management, LLC, an investment management firm located in Burlingame, California. Yee has more than ten years of professional experience in the financial industry and over 17 years of experience as a private investor. Having cofounded two startups, he invests with the mindset of a business owner. Yee received his Bachelor's degree in Economics from the University of California at Berkeley and is a member of the CFA Society of San Francisco.
This statement will probably sound weird coming from me, but it is true that “you can’t win by not losing.” What often prevent investors from making good returns are people’s fear of making any mistakes and their tenacity in not losing money on every single one of their investments.

While I always stress risk management in investing, I also believe in periodically taking calculated risks when the right opportunities arise. Doing so will allow you to come out ahead in the long run even if not every single one of your investments turns out the way you had hoped for.

Just do a simple research online and you can easily find investments committed by some of the most successful investors that have gone sour. For instance, legendary investor Jim Rogers was shorting oil in 1980, right before it shot up due to the war between Iran and Iraq.

Warren Buffett said, “During 2008 I did some dumb things in investments.” He regretted his investment in ConocoPhillips in 2008 that resulted in multibillion-dollar loss to Berkshire. Buffett trailed the S&P 500 index for 7 out of 22 years and last year his Berkshire Hathaway only advanced 2.7 percent while the market soared 26 percent!

Despite the above mentioned mistakes, both Jim Rogers and Warren Buffett are some of the most respected investors in the world.

Investing is very much like playing a poker game where there are always the known and the unknown cards on the table, and you will need to place your bets according to the statistics of winning. You can’t win all the time and that’s also why you do not want to put all your eggs in one basket. But if you are right most of the time and you make much more when you are right than you lose when you are wrong, you will do very well in the long run when you diversify your investments.

As Stanley Druckenmiller said, ”… it’s not whether you are right or wrong that’s important, but how much you make when you are right and how much you lose when you are wrong.”

To be successful in the real world, you need to invest when the statistics makes sense. If you invest only in government treasuries or bank CDs, you may have the peace of mind (most of the time) of not losing your savings. But this investment mindset will probably also restrict your money from working hard for you, allow inflation to eat into your assets’ true value, and prevent you from coming out ahead at the end.

Disclosure: no positions

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