The best lessons are about learning what not to do. Great investors like Buffett and Klarman and others drill home the point of avoiding big mistakes. They understand how a loss can be compounded by a mental or emotional misstep, making recovery that much harder.
Like a lot of us, the great investors start out learning this first-hand. Painful experience — from time in the market — can be a great teacher. Mistakes are part of the process.
But they quickly realize there are more efficient, less painful ways of learning from other’s mistakes. As Howard Marks says, you just have to pay attention:
The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.
The great thing about hindsight is, it always points out what everyone did wrong.
At the end of 2007, Howard Marks relayed the many lessons he’d seen over the years, at it related to the financial crisis. He realized those lessons weren’t limited to the crisis but contributed in some way to investor losses in all market cycles.
So he shared the lessons again in his book, The Most Important Thing:
To much capital availability makes money flow to the wrong places.When capital is scarce and in demand, investors are faced with allocation choices regarding the best use of their capital, and they get to make their decisions with patience and discipline. But when there’s too much capital chasing too few ideas, investments will be made that do not deserve to be made.
When capital goes where it shouldn’t, bad things happen. In times of capital market stringency, deserving borrowers are turned away. But when money’s everywhere, unqualified borrowers are offered money on a silver platter. The inevitable results include delinquencies, bankruptcies, and losses.
When capital is in oversupply, investors compete for deals by accepting low returns and a slender margin of error. When people want to buy something, their competition takes the form of an auction in which they bid higher and higher. When you think about it, bidding more for something is the same as saying you’ll take less for your money. thus, the bids for investments can be viewed as a statement of how little return investors demand and how much risk they’re willing to accept.