Spotlight: What Could Go Wrong

Investing is a loser’s game and not anyone else but the investor, with his unforced errors, beats himself all the time. That’s why even an average performer can win this game by being consistent in avoiding mistakes. Focusing on what can go wrong has long been a hallmark of sound investing.

An investor needs to do very few things right as long as he avoids big mistakes. ~ Warren Buffett

If you don’t lose money, most of the remaining alternatives are good ones! ~ Joel Greenblatt

We are big fans of fear, and in investing it is clearly better to be scared than sorry.~ Seth Klarman

Superior returns are mostly earned through minimizing mistakes than through stretching for yield. ~ Howard Marks

Warren Buffett isn’t particularly prone to superlatives, so it’s high praise indeed that he calls two chapters in Benjamin Graham’s The Intelligent Investor – one on stock market fluctuations (chapter 8) and the other on margin of safety (chapter 20) – “the two most important essays ever written on investing.”

In the first, Graham introduces the concept of a manic-depressive “Mr. Market,” whose mood swings can lead to equity mispricing. In the second he describes how to manage risk by investing only when there is “a favorable difference between price on the one hand and appraised value on the other.” This margin of safety, Graham writes, “is available for absorbing the effect of miscalculations or worse-than-average luck.”

Focusing on what can go wrong has long been a hallmark of sound investing. Baupost Group’s Seth Klarman put it succinctly in an investor letter –

We are big fans of fear, and in investing it is clearly better to be scared than sorry.

But chances are that even the most avowed pessimists can have their attention to risk dulled by long periods of generally favorable market conditions and low volatility – becoming oblivious, as Klarman writes, to “off-the-radar events and worst-case scenarios.”

Many fund managers have unimpressive careers, not because they haven’t had any multi-baggers. They might have quite a few 10, 20, even-50 baggers, but along with those home runs they also have too many losers which end their careers too soon.

And yet they don’t learn from each other because you can still find many of them swinging for fences with every bet they make.

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