Ask any celebrated investor the secrets to their success, and they’ll probably mention their setbacks. Nobody is perfect. Everyone makes mistakes, and it’s learning from them that can separate the pros from the amateurs.
Fortunately, that doesn’t mean moving to the next level requires losing money. As Warren Buffett once said, the best way to learn is “vicariously” — from other people’s mistakes (1).
Buffett has confessed to a fair share of howlers. The same goes for Jim Cramer. The Mad Money host and author recently opened up to CNBC Make It about some of his biggest errors (2). He says learning from these “boneheaded mistakes” helped turn him into a better investor. And they can arguably help us, too, if we analyze them properly.
We’re often taught to be patient, stand by our convictions and ignore outside noise. However, sometimes things happen that warrant reevaluating an investment case.
Cramer learned this lesson with Bausch Health (NYSE:BHC). When investors dumped the stock after it fell short of its profit forecasts and faced earlier-than-expected patent expirations, he shrugged it off as ignorant panic selling. Cramer admitted preferring to believe the company’s PR rather than investigate the warning signs — and said it cost him “a fortune.”
Holding losers too long is one of the most widely cited blunders made by investors (3). Nobody likes to take a loss, and this emotion can overshadow rational thinking.
Ideally, investors should objectively analyze every holding after a setback. Before buying and becoming emotionally involved, it’s also wise to establish a list of minimum criteria to stay invested and potentially consider implementing a stop-loss order, which instructs the broker to automatically sell the stock if it falls to a certain price. The latter option especially makes sense with companies that have great potential and downside risk.
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Cramer fell into the trap of believing that historically well-run great brands are immune to economic and political risk. He was proven wrong with Estée Lauder (NYSE:EL).
When COVID-19 hit China, Estée Lauder’s biggest market, Cramer said he assumed management would adapt and the company would bounce back as it had always done. It didn’t. Management had no response to falling custom or the Chinese government’s subsequent crackdown on luxury goods, and it took the stock plunging from $370 to somewhere in the region of $90 for Cramer to wake up and smell the coffee.
Overconfidence and failing to respond when fundamentals shift are common errors. In a survey conducted by deVere Group, 38% of the high-net-worth respondents claimed their biggest mistake was banking on history repeating itself (4).
How can this be avoided? A good starting point is recognizing that brand strength isn’t always enough to survive setbacks and that a lack of response and the downplaying of major threats should be treated as red flags, even from executives with historically fantastic track records.
Another classic mistake is panicking at the first sign of danger.
In 2023, Cramer bought Oracle (NYSE:ORCL), believing its artificial intelligence (AI) prospects were being undervalued by investors. Everything was going smoothly, he said, then other parts of the business started disappointing, analysts became bearish and an angry Cramer lost sight of why he bought the stock in the first place and dumped it — just weeks before it rebounded off encouraging AI-related developments.
As previously mentioned, major developments warrant reevaluating an investment. In this case, there was no evidence to suggest the long-term drivers that convinced Cramer to buy were under threat.
Cramer let a fear of loss cloud his long-term strategy. To prevent this from happening, it can help to impose a cool-off period before pulling the trigger. Remind yourself why you invested in the first place and do your own research rather than be driven by external noise.
Billionaire hedge fund managers are renowned for voicing their opinions on how to invest money, and people often take the bait because they work for prestigious companies — and they’re loaded.
Don’t make this mistake. As Cramer said he learned early in his career, blindly following advice is foolish, especially from investors whose main priority is making themselves and their clients money.
The next time a so-called expert offers advice, be skeptical. Consider what they could gain from their comments and check out their track record. Have their predictions or stock tips been on point, or is their credibility questionable?
Considering all angles is important. But it’s equally crucial not to assume people with more money and experience always make the right calls and have your best interests at heart.
Cramer, like many other investors, was taught that bond yields reveal the future direction of the economy. He was convinced this technique was flawless, then he said he found out the hard way that the bond market’s forecasts can fail to materialize.
The takeaway from this lesson is to not base decisions on what just one person or indicator is saying. The next time expected returns are higher for short-term bonds than long-term ones, a classic recession signal, check to see if other indicators, such as purchase manager indexes, unemployment figures, the consumer confidence index and cyclical company earnings reports, validate that message.
And even if they do, don’t automatically interpret that as a sign to dump stocks. Recessions don’t last forever, and few publicly traded companies go bust when the economy is in the doldrums.
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BRK Daily (1); CNBC (2); The Journal of Finance (3); VettaFi (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
