Two weeks ago, at FreedomFest in Las Vegas – a libertarian investment conference dedicated to free minds and free markets – I participated in a panel discussion entitled “What Am I Missing? The Ultimate Question for All Bulls and Bears.”
The idea was to put together several experienced investors to discuss our biggest investment mistakes, then share what we’d learned in the hope of sparing attendees the same fate.
My fellow panelists included seasoned trader Keith Fitz-Gerald (chief investment strategist for Money Map Press), international speculator Doug Casey (chairman of Casey Research), and investor and financial commentator Jim Rogers (who co-founded the Quantum Fund with billionaire George Soros in 1973).
Anyone who’s invested in world financial markets for several decades – as the four of us have – has plenty of war stories, investments we’d like to forget.
But forgetting would be a mistake.
It’s only by remembering your worst decisions that you avoid making them again.
We took turns describing various strategies that had gone off the rails – and why. But I was particularly moved by Jim Rogers’ story.
In a series of emails leading up to our discussion, he had seemed flip.
“My approach to mistakes is just to not make any!” Jim wrote.
That reminded me of Will Rogers’ famous story about how to make money in the market:
“Take all your savings and buy some good stock and hold it till it goes up, then sell it.”
“What if it doesn’t go up?” someone asked.
“Don’t buy it.”
But Jim’s confession on the panel was brutally honest… and a near-perfect example of my own warning to investors.
As a former hedge fund manager, Jim Rogers is no stranger to high risk.
(You might recall that in 1992, the Quantum Fund famously made $1 billion in a single day by shorting the British pound just before a sharp devaluation.)
During the internet bubble nearly 20 years ago, Jim shorted five companies that he was certain would go to zero.
They did. But not before he lost everything.
As economist John Maynard Keynes noted, the market can remain irrational longer than you can remain solvent.
Despite his matter-of-fact tone, you could tell the loss still bothered Jim all these years later.
Nobody forgets going bust. Nor do they forget the reasons why.
Some would say the lesson here is that shorting stocks is inherently risky. There is no limit to how high a stock can go, so there is no limit to your potential downside.
And if you’re using leverage, the pain can get intense pretty quick.
But selling short is not always a bad strategy, especially when you’re disciplined about it. (By using buy stops, for example.)
Jim’s real mistake, in my view, was not asking himself the most important question an investor can ask: “What if I’m wrong?”
In my 33 years as a research analyst, investment manager and financial writer, I have heard many investors tell tales of extreme woe. At the source, there was always a failure to ask that vital question.
Investors who are long and fully margined fail to anticipate the consequences of a severe market downturn. (The same is true of those who merrily sell dozens or hundreds of puts during a roaring bull market.)
Investors who are completely in cash don’t stop to think that they may face a tough decision down the road: Having missed a major rally, do they finally get in and potentially suffer through the next correction… or do they stay on the sidelines and miss even more potential upside (and an even tougher version of the same question down the road)?
Hard-money types who have all their money in gold fail to hedge against what seems to them an unthinkable possibility: peace and prosperity.
And those who gamble everything on a handful of undervalued – or overvalued – stocks often learn that short-term market movements are utterly unpredictable.
In each case, an investor could sidestep disaster – or ultra-low returns – simply by asking, “What if I’m wrong?”
So do yourself a favor and take a good look at your portfolio.
Is it ultra-conservative, highly leveraged, underdiversified or extremely concentrated?
Imagine the consequences of being dead wrong. And then make the necessary adjustments today.