Investors, amateur or seasoned, time and again make same mistakes as others. Even being aware of these mistakes and their own biases does not counter their effects. Why?
As Taleb mentions in his book – Fooled by randomness, it is not natural for us to learn by just reading history. We have enough clues to believe that our human talent does not favor transfers of experience. It is a proven fact that as a child we learned only from our own mistakes; we learned not to touch a burning stove only when we burned our fingers. No possible warning by others can lead to developing the smallest form of cautiousness. Adults, too, suffer from such a condition.
This ignorance towards the experience of others is not limited to children or adults; it affects business decision makers and investors at large.
If you think that merely reading history books would help you learn “from other’s mistakes,” consider the following nineteenth-century experiment. In a well-known psychology case the Swiss doctor had an amnesic patient completely down with her ailment. Her condition was so bad that he would have to reintroduce himself to her at a frequency of once per fifteen minutes for her to remember who he was. One day he held a pin in his hand before shaking hands with her. The next day she quickly withdrew her hand as he tried to greet her, but still did not recognize him. Since then plenty of discussions of amnesic patients show some form of learning on the part of people without their being aware of it and without it being stored in conscious memory. We have two memories, the conscious and the nonconscious. Much of the risk avoidance that comes from experiences is part of the second, it get stored in the nonconscious memory.
In investing too, unfortunately, we don’t learn from other’s mistake. At the same time, we tend to learn the wrong lessons from history, as it is convenient to do so. We think past is introduction to future. We anchor to irrelevant past returns.
There are hundreds of books on Warren Buffett and thousands of books on how to get rich doing trading, but what’s lacking are books that focus on the stumbles that the best investors faced along the way. We tend to benchmark with people like Warren Buffett, wanting to know what his secret is. How did he amass billions of fortune. But we fail to read about his mistakes, for instance, from June 1998 through the middle of March 2000, the S&P 500 gained 28%. Buffett’s Berkshire Hathaway lost 38% over the same period. No quotes or stories that float on social media detail this failure, and what he did to overcome it.
As we are tuned to learn only from our own mistakes, many investors are seen doing the same mistakes as others and learn the hard way. As they say, the most memorable teacher in investing is making a mistake yourself and learning from the pain that came from it. A mistake you do not learn from is a mistake you will repeat.
One of the key reasons for not able to learn from other’s investing mistake is ignorance. We ignore the fact that there are risks in investing. Risk is high just when we think it doesn’t exist. We ignore the fact that we all are still learning and we don’t know all the rules of this game call investing. One way to be able to learn from other’s mistake is to be humble, accept that you can make mistake. Read more about failures than success stories in investing. Put certain risks from your conscious mind to nonconscious mind by learning more about these risks and reminding yourself about them. Learn to respect these risks.
But remember, the best investing lessons learned will be those learned from your own mistakes. Mistakes will happen, we just need to learn to not repeat them, how to recover fast from them and minimize our losses.