A “Trade Secret” That Keeps Successful Investors Successful
Failing to practice this “secret” is what keeps the average investor average
In the 1960’s and 70’s, Jonah Barrington became British and world squash champion by following a very unusual strategy: he focused on never making mistakes.
In squash, as in racquetball, making a mistake is missing the ball or failing to hit it back to the front wall. Squash is a very fast-moving game involving short, speedy sprints from one side of the court to the other, followed by another sprint just a few seconds later. A championship squash match can last as long as a 5-set Wimbledon final, and be far more exhausting.
To carry out his strategy, Barrington worked on building an inexhaustible stamina. No matter how long a match took, he was still there, still hitting the ball back to the front wall, long after his opponent was beginning to tire. He outlasted his opponents to the point where their mistakes cost them the game.
In one sense, Barrington never really won his games, his opponents lost them.
A Barrington-style investor, focusing primarily on avoiding mistakes—meaning losses—could easily end up with a portfolio of very low-risk investments like government bonds, giving him an equally low return.
Just the same, he would be practicing Warren Buffett’s “First Rule of Investing: Never Lose Money.” (Buffett’s second rule is: “Remember Rule #1.”) At the minimum, such an investor could preserve the purchasing power of his capital intact.
This, while hardly exciting, would have been quite an achievement for some of the investors I have coached. One of my favorite questions for an investor is: if you’d never made any investments at all, and just let your money sit in the bank instead, would you be better off or worse off today?
I was surprised when one of my clients, Geoff, did a quick calculation and figured he’d be $5 million better off. Another one, Jack, had actually thrown $7 million down the drain. They both ran very profitable businesses, which is how they continued to live in comfort while putting so much money into investment “gold mines” that turned out to be black holes.
It quickly became apparent that both these gentlemen were motivated by the belief that the “right” investment existed somewhere, and all they had to do was find it. If they lost money in gold, then obviously that was the wrong place to invest. Perhaps, silver, or oil, or high tech stocks, or junk bonds would give them the answer they were looking for. Or perhaps, it was the “right” manager: if they lost money in one fund, they’d try another.
At no point did they look back and ask themselves the simple question: what did I do wrong?
This is a question the great investors are continually asking themselves. When they suffer a loss, they never say “the market went against me” or “I should never have followed that guy’s advice”; they always take complete responsibility for themselves and never blame anybody else.
They then analyze what they did wrong and find out why, so they are continually learning from their mistakes. Behavior diametrically opposed to Geoff’s and Jack’s, who kept repeating the same blunders time and time again.
My next question was: where have you ever made money? Geoff realized that his real estate investments had always been profitable. But he was continually enticed by the much bigger profits other people were making in the stock market, commodities, oil—or whatever the “flavor of the month” was. In none of these areas did he have any expertise whatsoever. The moment he stuck to real estate, which he knew, he stopped losing money and has been building his wealth—slowly to be sure, but consistently—ever since.
There was no pattern to Jack’s investment profits. Sometimes he got lucky; most of the time, he didn’t. He realized the only way he could be sure of making money was by focusing on his business. Today, his investments consist of (very boring) interest-bearing deposits. And because his mental focus is now entirely on his business, he has doubled its profitability. All that time he was out chasing rainbows in the markets, he’d been sitting on a gold mine—and didn’t realize it.
Following a Barrington-style strategy of avoiding mistakes means more than just not losing money. It frees up your mind to focus on that area where you’re best equipped to make it.
Adding to that practice of openly and honestly analyzing your mistakes makes sure you will never repeat them.
Warren Buffett credits his partner, Charlie Munger, with persuading him of the usefulness of studying one’s mistakes. As Munger puts it,
“It is really useful to be reminded of your errors. I think we’re pretty good at that. We do kind of mentally rub our own noses in our own mistakes. And that is a very good mental habit.”
George Soros goes even further when he says: “Where I do think I excel is in recognizing my mistakes . . . that is the secret to my success.”