You’ve probably heard of the phrase — no one is perfect.
When it comes to investing, this phrase rings truer than most other endeavours.
In the realm of sports, you have tennis greats such as Roger Federer.
He has dominated tennis championships for years and has won an impressive string of Grand Slam Titles.
Yet, even Federer makes mistakes. In tennis, these are known as “unforced errors”, or unintentional errors due to fatigue or carelessness.
If we apply the same concept to investing, it would be mistakes we could have avoided.
A matter of process
An important thing to remember about investing is that the investor is dealing with both probabilities and uncertainties.
Hence, a strong investment philosophy, coupled with a consistent process, are key factors for long-term success.
Yet, the element of luck plays a role in determining investment outcomes
Simply put, even if your investment process was robust, bad luck could still lead to a poor outcome for your investment.
Over time, as you continuously hone your investment process, the role of skill will play a greater role in determining investment outcomes.
Even Buffett isn’t perfect
Warren Buffett is widely acknowledged as one of the greatest investors in the world.
His track record of growing wealth has been unparalleled in modern times.
Yet, even he makes occasional mistakes.
He has documented such mistakes in his shareholder letters over the years.
In his 2007 shareholder letter, he described his mistake in the acquisition of Dexter Shoes, a shoemaker based in Maine, USA.
The shoe company was acquired back in 1993 using his company stock, Berkshire Hathaway (NYSE: BRK.A).
However, Dexter Shoes soon collapsed under pressure from cheap imports.
The mistake was worth around US$8.7 billion as he had paid for it using 25,203 Class A shares in Berkshire.
If even the Sage of Omaha can admit to making mistakes, what more the average investor?
Six out of ten is superb
For a realistic feel of what a good hit rate is for your investment picks, look no further than what Peter Lynch said.
Lynch used to run Fidelity’s Magellan Fund between 1977 and 1990.
His track record was superb, chalking up an average annual return of 29.2% for his fund during that period.
What he said was this:
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
According to Lynch, a 60% success rate should be considered to be good.
Get Smart: Don’t forget portfolio allocation is important
On a personal note, I used to try to get all my investments right and would beat myself up if I lost money on any position.
Now, I realise that that was not a realistic approach.
Some factors are beyond our control when we invest.
Just as life is unpredictable, we should also buffer for instances where things may go wrong.
Furthermore, making the right decisions is not the only factor.
There’s also the matter of how much we make when our investments turn out well, versus how much we stand to lose should something go awry.
A good hit rate may not always determine if the overall portfolio does well.
The idea in investing is to deploy more capital to ideas that have a favourable risk-reward ratio while placing less money in ideas that are deemed “riskier”.
So, dear investor, do not obsess too much over your success rate.
It is far more important to allocate capital smartly, rather than aim for bragging rights.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.