FNArena Book Review: How Not To Lose 1 Million

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How not to lose 1 million by John Addis.

By Rudi Filapek-Vandyck

We all make mistakes, while investing and otherwise, and that’s not necessarily a bad thing if those mistakes teach us a lesson and we learn from them.

This is the true value from John Addis’s book How not to lose $1 million. The co-founder of Intelligent Investor draws from more than two decades of making mistakes, with plenty of self-criticism and some humour, allowing investors the opportunity to (potentially) learn from mistakes they never made themselves.

It is this approach that sets Addis’s self-reflections apart from most other investment books written by peers in Australia and abroad who usually focus on the nitty gritty of how to properly value a company or sing the praises of many success stories instead.

Both story lines are noticeably absent from this book. Instead, the reader can indulge in the many errors Addis and his team at The Intelligent Investor have made.

There are plenty to choose from; from selling out too early (and never buying back in), to staying loyal and ignoring all the red flags, to underestimating real risk and falling in love with a charismatic business leader (and many more variations).

Addis is a traditional value’ investor. Selling out of Cochlear ((COH)) ahead of many more share price gains is explained as one of his career-defining mistakes.

Harry Hindsight is a wise man, of course, and always 100% accurate.

Whether Addis would stay on board of a company whose PE multiple is more than three times the local market’s average is a question only the author can answer, but the lesson has been learned:

“Quality is easily recognised, which is why the best companies rarely trade at cheap prices. Even when they stumble, investors generally recognise their ability to quickly recover. This is the price of quality. Usually, it is worth paying for. It is better to own a great business purchased at a reasonable price than a poor one purchased cheaply only to watch it become cheaper still.”

On my own observations, value investors that would in the past never consider paying up for above-average corporate quality nowadays own shares in the likes of Car Group ((CAR)) and CSL ((CSL)), so clearly some important lessons have been learned across the industry in recent years.

This book is written with 100% hindsight, and wouldn’t we all be able to travel back in time and approach many of our investment decisions in a different manner?

Yet, the fact a share price doubled or tripled does not by definition mean we made a mistake or missed an opportunity. This is probably the most difficult case study to explain to investors and Addis does it by referencing Afterpay, a local success story he does not regret not having owned.

As an investor, the author proclaims, it is important to stay true to one’s investment style and risk-assessment and Afterpay simply never appealed because it was always too risky and unproven as an emerging new business.

For those who did enjoy the stellar gains made in the company’s short life as an independent, ASX-listed business, Afterpay is now the prime example for the risk of underestimating how exceptional its business experience has been, argues the author.

If Afterpay somehow has awoken the taste for more of the same, Addis highlights those who seek the next one hundred bagger are far more likely to end up accumulating losses. Because the risks involved are tangible and one never knows when exactly those risks rise to the surface.

In Afterpay’s case, we will simply never know as Block bought the business in January 2022 and kept the operation hidden inside group accounting since.

Better not to feel sad about such missed opportunities, Addis insists, the rear-view mirror is staring at the past.

“Select a few well-researched, high-quality investments, purchase them at reasonable prices and let compounding do its work. By not seeking, you may find.”

And also:

“[] there is no substitute for expertise and research. Things can and will go wrong, even for those on the inside playing with smart money. We can all fall victim to tightly held beliefs. If you want to improve, learn from your failures and those of others. Unfortunately, there is no other way, and sometimes the lessons will be expensive.”

How not to lose 1 million. Win at investing by losing less by John Addis, published by Major Street Publishing, 185 pages.

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