Ask any famous investor the secrets to his success and he’ll probably mention his setbacks. Nobody is perfect. Everyone makes mistakes and learning from them is what can separate the professionals from the amateurs.
Fortunately, that doesn’t mean that moving to the next level requires losing money. As Warren Buffett once said, the best way to learn is “vicariously,” that is, from other people’s mistakes (1).
Buffett has confessed to having had his fair share of howlers. The same goes for Jim Cramer. He mad money The host and author recently spoke with CNBC Make It about some of his biggest mistakes (2). He says learning from these “dumb mistakes” helped him become a better investor. And arguably they can also help us if we analyze them properly.
We are often taught to be patient, stand up for our beliefs, and ignore outside noise. However, sometimes things happen that warrant re-evaluating an investment case.
Cramer learned this lesson with Bausch Health (NYSE:BHC). When investors dumped the stock after it missed its earnings forecasts and faced earlier-than-expected patent expirations, he dismissed it as ignorant panic selling. Cramer admitted that he preferred to believe the company’s public relations rather than investigate the warning signs, and said it cost him “a fortune.”
Holding on to losers for too long is one of the mistakes most cited by investors (3). No one likes to lose and this emotion can overshadow rational thinking.
Ideally, investors should objectively analyze each holding after a setback. Before buying and getting emotionally involved, it is also wise to establish a list of minimum criteria for staying invested and potentially consider implementing a stop-loss order, which instructs the broker to automatically sell the stock if it falls below a certain price. The last option makes special sense in the case of companies that have great potential and risk of decline.
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Cramer fell into the trap of believing that historically well-run large brands are immune to economic and political risk. I was proven wrong with Estée Lauder (NYSE:EL).
When COVID-19 hit China, Estée Lauder’s largest market, Cramer said she assumed management would adapt and the company would recover as it always had. It wasn’t like that. Management had no response to falling customs or the Chinese government’s subsequent crackdown on luxury goods, and the stock fell from $370 to around $90 to make Cramer wake up and smell the coffee.
Overconfidence and failure to respond when fundamentals change are common mistakes. In a survey conducted by deVere Group, 38% of high-net-worth respondents said their biggest mistake was trusting history to repeat itself (4).
How can this be avoided? A good starting point is to recognize that brand strength is not always enough to survive setbacks, and that failure to respond and downplaying significant threats should be treated as red flags, even by executives with historically fantastic track records.
Another classic mistake is to panic at the first sign of danger.
In 2023, Cramer bought Oracle (NYSE:ORCL), believing investors were undervaluing its artificial intelligence (AI) prospects. Everything was going well, he said, then other parts of the business began to disappoint, analysts became pessimistic, and Cramer angrily lost sight of why he bought the stock in the first place and dumped it, just weeks before encouraging AI-related developments picked up.
As mentioned above, significant developments warrant reevaluation of an investment. In this case, there was no evidence to suggest that the long-term drivers that convinced Cramer to buy were under threat.
Cramer let the fear of losing cloud his long-term strategy. To prevent this from happening, it may be helpful to impose a cooling-off period before pulling the trigger. Remember why you invested in the first place and do your own research instead of getting carried away by outside noise.
Billionaire hedge fund managers are famous for expressing their opinions on how to invest money, and people often take the bait because they work for prestigious companies and are wealthy.
Don’t make this mistake. As Cramer said he learned early in his career, blindly following advice is foolish, especially from investors whose top priority is making money for themselves and their clients.
The next time a so-called expert offers you advice, be skeptical. Consider what they could gain from their feedback and check their track record. Have your predictions or stock suggestions been accurate, or is your credibility questionable?
It is important to consider all angles. But it’s equally crucial not to assume that people with more money and experience always make the right decisions and have your best interests at heart.
Cramer, like many other investors, was taught that bond yields reveal the future direction of the economy. He was convinced this technique was perfect, but later said he found out the hard way that bond market forecasts may not materialize.
The takeaway from this lesson is to not base decisions on what a single person or indicator says. The next time expected returns are higher for short-term bonds than for long-term bonds, a classic sign of a recession, check to see if other indicators, such as purchasing managers’ indexes, unemployment numbers, the consumer confidence index, and cyclical corporate earnings reports, validate that message.
And even if they do, don’t automatically interpret it as a sign to dump the stock. Recessions don’t last forever, and few publicly traded companies go bankrupt when the economy is in the doldrums.
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daily BRK (1); CNBC (2); The Finance Magazine (3); VettaFi (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
