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Analysis of past mistakes a prerequisite to success
Aftermath of recent equity rally illustrates importance of retrospection
- By Jonathan Davis, Financial Times
- Published: 00:00 November 7, 2009
Happy the fund manager, policymaker, or retail investor who could, hand on heart, echo the sentiments of Frank Sinatra's signature tune: "Regrets — I have had a few, but then again too few to mention ...". They may do it their way, but it is rare indeed for that way to be free of regrets. More often, the regrets are too many, not too few, to mention.
It took me many years to realise the force of Charlie Munger's observation that the aim of investment is to minimise regret, or to minimise the opportunity cost of the decisions that you make.
Acting in good faith is a necessary but insufficient condition for achieving successful long-term results. Quality of thinking, provided that includes retrospective analysis, and temperamental maturity matter much more.
Keeping the concept of minimising regret in mind can lead to some powerful changes in emphasis and approach. Just as corporations rarely spend much time analysing the outcome of their investment decisions, which condemns them to repeat them again in future, so professional investors are typically far more interested in analysing the next good thing at the expense of understanding why the last good thing turned out to be so disappointing.
Equity example
Yet the latter approach will never be time wasted. The strength of the recent equity market rally provides a perfect example. Only those who had experienced or studied the way that previous bear markets end are likely to have avoided being caught out by the force of the recovery, which has sent emerging market equities up by 80 per cent in some cases, and the S&P index by 50 per cent from March lows. The process may still not be over, as there remains plenty of uninvested cash sitting in institutional and discretionary accounts. As the year end approaches, fund managers who have been left behind are suffering huge dollops of regret.
The chances are however that unless they absorb the lessons of their failure to spot the change in market dynamics this time round, they will make the same mistakes again in future.
For the retail investor, the paradox is that the regulators' sensible (but largely futile) strictures against reliance on past performance may also have a downside, if the message obscures the fact that analysing past performance is a prerequisite to doing better in future.
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