Book Reviews | Sep 19 2024
Book excerpt from: How Not to Lose $1 million by John Addis, Co-Founder of Intelligent Investor
Published by Major Street Publishing
According to John, “The path to investing success is one of repetitive failure. The learning is in the failing.”
For three decades John Addis has been researching, writing about and investing in stocks in Australia and overseas. Over the years, he has made millions of dollars in his funds management business. He also estimates that he has lost $1 million along the way through mistakes he has made. Looking back on his investment career, John has found that the most valuable lessons he has learned came from the stocks and trades that lost money. It is these lessons that he shares in this fascinating new book.
Part 1: Stocks We Sold Too Late
In her book Quit: The Power of Knowing When to Walk Away, Annie Duke tells the story of Muhammad Ali’s rise against the odds to become the greatest boxer of all time. Refusing to serve in the Vietnam War, Ali was stripped of his heavyweight title in 1967.
Unable to box for three and a half years, it took him four more years before he could challenge George Foreman to regain the title. In 1974, aged 33 and a decade after originally being crowned champion, that is what he achieved. This tremendous sporting feat is still celebrated today, along with the grit and unbreakable determination that helped bring it about.
When he regained the title, Ali had competed in 46 professional fights. Despite signs of mental and physical deterioration, and warnings from doctors and advisers, he went on to fight for seven more years. In 1980, he fought what would become his penultimate match, against then-champion Larry Holmes. The beating Ali received was so severe Holmes wept after it. Actor Sylvester Stallone described it as like watching an autopsy on a man who’s still alive’.
After his final loss in 1981, Ali retired. Three years later he was diagnosed with Parkinson’s disease. The punches he took over a long career were crucial to his condition. Despite the decline and severity of his condition, Ali simply could not give up.
As Duke writes, ‘While grit can get you to stick to hard things that are worthwhile, grit can also get you to stick to hard things that are no longer worthwhile. The trick is figuring out the difference’.
This section covers three stocks where we failed to figure out the difference.
There is a unique unhappiness about buying a company, watching the investment case come apart and then failing to act quickly enough How not to lose $1 million to limit the damage. These are not the most devastating errors, those are reserved for Part II but they are the most common.
The reason is as Duke describes. Grit is what makes value investing work. The ability to do what others cannot to find a cheap stock and buy it when everyone else is screaming ‘sell’ is central to it.
It can also be the source of error, mainly because the act of purchasing a stock deepens the commitment to it. When that happens, the grit is already in the gears. Reversing when you expected to accelerate is like trying to jam a fish into a sock: most people simply cannot even contemplate it.
Investing is more capricious and less predictable than we imagine, an art as much as a science. Errors are inevitable, with this book proof of it. Not acting fast enough to sell stocks that weren’t playing out as we expected is the source of most of our errors. This is where the agonies and sleepless nights lie: the red flags ignored, the clues missed in ASX announcements, the complexities neglected and the pride that got in the way.
The sharemarket excels at crushing the egos of the overconfident and ill-informed. If one is prepared to accept hard truths brutally dispatched, the opportunities to learn are as plentiful as they are painful.
Each of the three following case studies created painful and necessary scars. Growth is not in the success that confirms our brilliance but in the failures that confound and nearly break us. The grit that is required to examine them is as necessary as that required to buy the stocks in the first place.
While the sources of failure were different in each case, they are bound together by a primal question: after making up our minds about a stock and putting money behind it, in the face of changing facts, why didn’t we change our minds?
Book excerpt from: How Not to Lose $1 million by John Addis, Co-Founder of Intelligent Investor, Published by Major Street Publishing.
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