Air travel is one of the safest modes of transportation, with just one fatal accident for every 16 million flights.
There’s a good reason for that, says Matthew Syed, the author of “Black Box Thinking”.
Black boxes in every aircraft record what happens, providing insights during the postmortem of each air crash so that everyone, from pilots and technical officers to airplane manufacturers, can learn from them.
The same rigour should be applied to investing.
When it comes to buying and selling stocks, you cannot afford to sleepwalk your way through the process.
Your mistakes will cost you money. Or worse, your retirement.
Keeping an open mind
Can you recall the last time you made a mistake?
Many fund managers find it hard to do so.
That’s because an admission of failure would leave them vulnerable and portray them as uncertain and sub-par.
There is also the fear of the exodus of money or worse, the fund shutting down altogether.
One glaring exception is Warren Buffett, who regularly details his investment mistakes in the annual letter of his company Berkshire Hathaway (NYSE: BRK.B).
We will do well to follow Buffett’s lead.
As investors, we should have no qualms about recognising our mistakes.
As Syed writes, failure is rich in learning opportunities as it represents “a violation of expectations”.
As an investor, you need to understand that making mistakes in a complex world is not just normal but is helpful in enabling us to improve.
The natural expectation is for an investment to perform well, especially since we spent time and effort on our research.
When it does not, there is a tendency to attribute it to bad luck rather than admitting that there were gaps in our assumptions or logic.
The right attitude would be to acknowledge that we are far from perfect and to actively recognise and learn from the investment mistakes we make.
Put your ego aside
So, how do we find the courage to admit our mistakes?
The answer lies with ourselves.
Ego and pride are always at play when money is involved.
Moreover, investing has increasingly become a social exercise with the advent of social media, chat groups, investment blogs and internet forums.
This phenomenon has an unfortunate side effect.
Investors are constantly comparing themselves against others, in a race to see who has the better returns.
In the heat of competition, many are unwilling to accept when they have made an error.
But know that the true aim of investing is to fulfil your own investment goals.
By setting aside your ego and taking active steps to identify errors, you can start the process of becoming a better investor.
James Dyson, the famous billionaire inventor who revolutionised the vacuum cleaner, made a stunning 5,127 different prototypes before he was ready to present his improved version.
It’s a little different for investing as most of us may not have such a large sample size to work with.
We can, however, do better by keeping a diary of our investment decisions.
Memory is not as reliable as we think it is and our brains may subject us to a load of hindsight bias.
By sieving through our past investment actions, we can spot unhealthy patterns or bad habits that we should actively eliminate in the future.
An iterative process
Our learning process should be iterative.
By recognising your mistakes and noting them down, your brain learns and helps refine your investment process.
You may have heard market commentators coming up with a daily set of reasons on why the stock market goes up or down.
This is known as the “narrative fallacy”.
Unfortunately, these commentators constantly need to “invent” reasons to make them sound knowledgeable.
As investors, we should not make this same mistake.
Each time we commit an error, we should avoid justifying or explaining it away.
Instead, we need to dig out the underlying reasons for the failure and incorporate these into our future investment decisions.
I started documenting my investment decisions as early as 2005 and have made my share of mistakes over the years.
But as time passed, I found myself learning valuable lessons and, as a result, started to modify and adapt my investment philosophy.
This simple refinement has resulted in fewer errors and a much better overall investment performance.
Learning from your mistakes is actually the toughest part of this whole process.
The complexity involved in investing means that no two errors are the same.
But by sieving out mistakes made, the valuable lessons learnt will serve us well in the future.
It may not be noticeable at first, but by taking a series of small steps, you can experience a marked improvement in your investment results over time.
Becoming a better investor
In the end, what does becoming a “better investor” entail?
There are two aspects to this.
Firstly, you will want to make fewer mistakes.
Reducing the frequency of mistakes shows that your investment process has become more robust.
Secondly, the goal is to ensure that any future mistake made is minor.
Small errors have a distinct advantage – they help you to learn and also will not lower your investment returns.
Risk control and portfolio management go hand in hand in achieving this second objective.
I know that I’ll probably still make new mistakes even after learning from my older ones.
But I am not afraid to face them head-on with the knowledge that such mistakes, when internalised, will make me a better investor.
And I am sure that’s what everyone out there is striving to become.
Note: An earlier version of this article appeared in The Business Times.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
