Several years ago Tom Gayner did a great interview with MOI Global in which he discussed a number of topics including some of the mistakes that investors make which stop them from reaching their goals. This included a valuable lesson he learned from Shelby Davis. Here’s an excerpt from the interview:
MOI: What is the one mistake that keeps investors from reaching their goals?
Gayner: I’ve made so many mistakes over the years that I struggle to isolate just one as the biggest single mistake. Among the choices though I think excessive leverage has been the most personally painful. I did not fully appreciate the degree of leverage that existed in so many aspects of so many businesses and how painful the unwinding of that leverage would prove to be.
Leverage also can be a good guide on the integrity factor that I mentioned earlier. One of the great investors I’ve tried to learn from is Shelby Davis. Shelby said that you almost never come across frauds at companies with little or no debt. If you think about it, that statement makes perfect sense. If a bad person is going to try and steal some money, they will logically want to steal as much as possible. Typically, that means they will have as much debt on the books as possible in addition to equity in order to increase the size of the haul. Staying away from excessive leverage cures a lot of ills.
Another huge mistake that I think people in general make is to mislabel risks. Specifically, people seem to think about risks in nominal rather than real terms. To have a lot of cash or government bonds has been a comforting thing in the past few years, but I think it is a mistake to think that means you are not taking risks. You are, it’s just that you are taking real risks as opposed to nominal ones. The purchasing power of the currency continues to decline. It is a huge mistake not to take that into account.
The other types of mistakes are well known and probably not too valuable to rehash. Chasing performance, thinking you can really effectively trade in and out of the market, using volatility as a precise quantitative measurement of risks etc… are all potential mistakes that investors tend to make.
To circle back to your original question about what is the single biggest risk, I would try to summarize all of these things as examples of not thinking. You can never put things on autopilot in this world. You must be constantly and continuously engaged with what is happening in business, technology, marketplaces, governments, social trends, demographics, science and absolutely everything you can possibly process in order to be as good a thinker as possible. When you go to sleep each night, be prepared to get up in the morning and do it all again for as long as you are responsible for taking care of people’s money. There are no days off.
You can read the interview here:
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