double_investment.jpgThe other day I read about someone who claimed to have doubled his investments every month for more than a year now. If I do the math’s it turns out that this man must have multiplied his money to more than 4,000 times what it was. That’s 4,000 times, not 4,000 per cent. The interesting part is that not only do such people expect to be believed; there are those who believe them. If you ask a random collection of people whether they think it possible that somewhere in the world there exist investors who can go on doubling money every month, then you’ll get a surprising number of yeses. This sounds like believing in anything you hear.

No one who invests in the stock markets ever loses any money. Or at least, that’s what I will have to believe if I take at face value whatever someone says about their personal performance in managing their investments. I’m serious. It’s amazing, actually. The markets fall. Dubious stocks shoot up and people keep buying them and then when the markets fall and stagnate and no one admits to having lost any actual money. To be fair, there are some who admit to holding investments that are way under water from their purchase price, but claim that this is not a loss but a temporary dip.

That’s a point of view, I suppose. Not only does this undying faith in the existence of supernatural rates of return persist, it does a lot of real harm.

The refusal to admit to wrong investing decisions means that we miss the opportunity to learn from them. I know these sounds like a slogan from one of those motivational posters, but failure really is a very good teacher. Provided one makes the effort to learn from it.

And at least in the case of investments, it isn’t all that difficult to learn from bad investments. What one has to do is to honestly think of the reasons why one bought that investment and then resolve not to repeat that reason without any further refinements.

Let me illustrate with a couple of examples.

READ

Let’s say you put a chunk of money into a new mutual fund because the fund salesman said other funds of that fund company had a great track record. Now that this new fund has done worse than the older ones, you only need to think back carefully at your reasons for the investment and the cure is self-evident.

Of course there’s a danger in not making this analysis general enough. Let’s say a friend of your boss recommends a stock and you buy it without any further inquiry and then the stock price collapses. Surely, the lesson is not that you shouldn’t buy a stock on the recommendation of the bosses’ friend or even friends in general but that you shouldn’t make investments you do not understand. Chance and luck may have played a role in a big success that someone may have had. It isn’t very wise to mistake that for magic and imagine that it’s repeatable by waving a wand.