By Adam Wilk • 12 Dec 2024
Mistakes are disguised as things we don’t want. In reality, they are essential for moving yourself forward in your life or your craft.
If you are lucky enough to manage money on behalf of others, ‘personal growth’ is likely not why they hired you to do so. But investment mistakes are unavoidable, so when you make them, it’s best to learn from them and improve your process as a result. Especially if you are trying something new. Which is never a mistake.
Some of my biggest investment mistakes have been backing first-time public market CEOs, and unproven business models. Both done in the spirit of trying something new. Lucky for me, management due diligence blunders and business operational issues were compounded by portfolio and risk management mistakes, allowing me to make the investment mistake equivalent to 'hitting the cycle'. Valuable lessons were derived from those investments, leading to important process improvements that may not have been implemented were it not for the mistakes made.
Investing is not the only field where this idea of mistakes as beneficial can be found.
Singer John Mayer, actor Matt Damon, producer Rick Rubin and designer Paula Scher, all use failure and mistakes to elevate themselves and their crafts. Grammy winners, Oscar winners and award winning designers have recognized the power of mistakes.
Matt Damon shared his experience making a movie that was considered a flop:
"I always tell people, you don't see the movie before you make it."
"You get the ingredients for whatever you're cooking and you get to see what the ingredients are and you go, 'All right, with all these people around we should be able to do something pretty good, or hopefully great.'
"Some of them just don't work."
John Mayer has often said that sometimes you have to write bad songs to get to the good ones. Mistakes can lead to interesting and unexpected music.
“Sometimes you have to write bad songs to get to the good ones. Give the worst ideas a chance because you never know. I’ve become a better guitar player but I make more mistakes, because I’m free.”
In a podcast interview a few years ago, Paula Scher beautifully describes how she is still living this process:
“I still do things that are pretty awful. It’s part of the process. You have periods of tremendous productivity and other periods where you’re fallow. The fallow periods are really important because that’s where you’re refiguring it out. You have to sort of work through this rough period of not quite understanding what you’re doing in order to discover something new. When you’ve had a successful run of things, that starts to become your modus operandi, and that’s very dangerous because you’ll only repeat and you’ll never be quite as insightful as you were the first three times you did it. So you want to kind of move yourself along to the next level. That’s painful. It seems scary but it’s really part of personal growth. The parts of yourself you think are failing are actually the things helping you grow.”
This sounds incredibly counterintuitive. How can sub-par work, or mistakes be an essential part of any creative process?
Because it provides the chance to remove one’s ego.
In fact, one of the central functions of any art form is that the majority of the work you do teaches you how to do the work that is truly great.
If you’ve ever made an investment mistake, you likely felt terrible shortly after the realization of that mistake. Losing money sucks. It pokes and prods at your ego, which is damaged from the experience. The ‘what-ifs’ start rolling in. What if I just added to my best idea instead? What if I sold after that one bad quarter? What if I had just not invested in the first place?
One of the most important attributes an investor can have is objectivity surrounding mistakes. Can you zoom out enough to honestly assess what went wrong? Good or bad outcome, there should be a clear documented path from the beginning of a decision to the result, which lets you objectively evaluate why you did what you did, and how you were feeling at the time. This was a lesson I had to learn many times.
Early in my investment career, I took every single mistake personally. Even when it was made with just my own capital. Much of my self-worth and identity was tied into my early results. So from that perspective, when I lost money or made a mistake, I was the mistake. This mentality can be incredibly damaging over time if you don’t rid yourself of this way of thinking. You are removing the one feedback mechanism that exists to evaluate a decision, which is the ‘this isn’t personal’ way of assessing your mistake. The best outcome after losing money is that you walk away from the post-mortem with the knowledge that you made the best possible decision given the work that was done and the information available at the time, but the result wasn’t favorable.
In a podcast interview with Rick Rubin, Scher elaborates on the concept above:
You move things forward and you make discoveries usually through mistakes. You’re doing something and you’ve made a terrible mistake and you stop. And then you realize there is a possibility. Then you can play with it, and move it forward, and stretch a form.
Rubin chimes in:
Some people’s egos wouldn’t allow a mistake to be a good thing. We have to be open minded enough to accept the mistake as better than what we were trying to do.
Instead of letting your ego get in the way, you have to be open minded enough to recognize the mistake as better than what you were trying to do. You make discoveries through mistakes.
As a result, there are a certain amount of mistakes you have to make in investing. There are a certain amount of really stupid decisions where you have to feel the pain of those failures. It’s good for your development as a portfolio manager, even if when dealing with other people’s money this can be construed as careless or insensitive.
You’ll often hear some of the best investment managers, such as Bill Miller, sounding a bit sociopathic, by advising to be unemotional about your decisions. Creating some disassociation isn’t a lack of care, but rather, if there is a part of your investment strategy or process that isn’t working or is leading to mistakes, you have to be able to step back and identify the mistake. As I had to learn, this is incredibly difficult to do when you feel as though you’re the mistake.
When you can’t separate yourself from your errors, that’s when emotions start to creep into portfolio decisions. The key, as Bill Miller says, is to have enough detachment to actively suppress the emotional ups and downs which cause bad decisions to be compounded by more bad decisions.
With my early mistakes, instead of making myself feel terrible, often for months, a better approach would have been to objectively step back, assess what isn’t working, and iterate from there. My process is much better equipped to handle mistakes today without them being crippling, and in that sense, mistakes can be very useful as an investor. They serve as an amazing check and balance tool, while allowing you to make new discoveries along the way. You shouldn’t seek them out, but they are also not meant to be avoided by allowing a mistake to destroy your ability to take calculated risks in the future.
In addition, when you rinse and repeat this process, your ego slowly withers away, and you can begin to codify in your mind the process of making a mistake and how to move forward.
The process looks something like this:
Mistake —> ego —> crippling —> no improvement
Mistake —> expected and necessary —> no ego —> iterate and improve
It’s not until you experience an investment mistake do you really gain context and allow the lessons to really stick. As you move through this process, and as your experience grows, so does your pattern recognition and ability to do great work.
Given that mistakes are inevitable, and they happen because you have yet to experience the consequences of that exact mistake, the key is to not repeat the same ones.
It’s here we can learn from the experience of others.
“He (Affleck) said to me really one of the most profound things, 30 years ago,’’ said Damon. “So he was 20 years old and I was 22 and we were starting to write ‘Good Will Hunting’ and he said, ‘Judge me for how good my good ideas are, not how bad my bad ideas are.’
“What it unlocks is your ability to throw the window as wide open as you can and just throw out every idea that you have without any ego at all,” Damon continued. Sometimes you have to get through a lot of bad ideas to get to the good ideas. It was a really incredible thing for a 20-year-old kid to say, and I’ve carried that with me through everything that I’ve done, and everything that we have done together, and I always will.”
Bringing back something I wrote earlier in the post:
One of the central functions of any art form is that the majority of the work one does as an artist teaches us how to do the work that is truly great. But you don’t see the movie before you make it.
Investing is about managing emotions when making decisions, dealing with uncertainty and risk, and being okay knowing that there will be both mistakes (bad decisions) and bad outcomes (being unlucky). Thankfully in public markets, we don’t have to stick around to finish making a bad movie. But we can always learn from our mistakes, without letting them cripple us. That’s the path to improvement over time.