2020 was a great time to invest. All that I touched, turned to gold and there seems to be a touch of hubris that affected me post that. People panic all the time. Somehow, I thought that Covid was a virus after all and was crazy enough to be in good equities and bought more exhausting all my liquidity.
That was a great year. But, then again, buying in 2020 is not a skill. It is purely buying at the right time. It is luck.
I think I mistook that for skill. I was wrong.
Many of the stocks I touched in 2021 are trading at lower prices in 2022. At least till now. I deeply looked at each one of my mistakes. Most of my picks don't have anything bad in their fundamentals. But, I have been woefully wrong in gauging their strengths. Overpaying for them.
Most company strengths are based not just on the skills of the management, the market they play in, competitive strengths, or their past successes but driven in part by external factors. That they play in friendly playgrounds. A lot of factors help their growth: Government support, Liquidity (a rising tide lifts all boats), Lure of a recovery spurring short-term demand (and then, you consider that as a given for a number of years ahead), and Low-interest rate environment continuing, etc...
These, and many more, are errors I fell prey to in 2021. I wish I had been more careful. But, I cannot go back to change what has happened. Not jumped into buying. Waited.
I recently read a wonderful book written by Adam Mead - The Complete Financial History of Berkshire Hathaway. Adam analyses basically everything Buffett did at Berkshire for the past 55 years. And even a historical perspective of Berkshire right from the 1930s.
I think he wrote it for Buffett aficionados. It's a rather dry, long, rambling book, but I rather enjoyed it. I re-read the lines I marked out and cross-referenced Buffett's biggest successes and failures and some patterns which led to them being successes or failures.
One thing that clearly strikes me is the unwavering discipline that was maintained by Buffett in any of his buys. The clarity of thought of understanding the downsides more than the upside is very clear in all his successes.
Where he missed analyzing the downsides/risks (Dexter shoes with Chinese competition, Gen Re with its derivative book, IBM with tech obsolescence and changing direction), etc. are clearly the ones where he missed something vital in analyzing the ecosystem. And hence he overpaid.
If I have to point out what I did not do well in 2021, it is summarized by three words: "Margin Of Safety". I basically failed in looking for risks that warranted an extra margin of safety.
Buffett bought Gen Re in the late 1990s and it took a long time for him to set that business on the path to success.
In doing so, he talks about the characteristics of a sound insurance operation (quoted from page 546, footnote 2 of Adam's book):
1) An understanding of all exposures that might cause a policy to incur losses;
2) A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does;
3) The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and
4) The willingness to walk away if the appropriate premium can't be obtained.
These principles apply not just to insurance companies, but to all companies in general. All you need to do is, replace some of the specific terms he has used with more generic terms.
I put my guard down in buying some (good) companies at prices that were not discounting all the potential and probable risks. I am paying the price for that error.
Here is an old Graham quote that is so apt:
The problem overlooking the margin of safety is: that you'll have to wait much longer for recovery. You have to go through the pain. There are no shortcuts.
There is no place for hubris in investing. You cannot correct mistakes already committed. Sometimes, if the money supply is plentiful, liquidity + low-interest-rate environment hides many of these errors. I reflected on that in my last post - Gravity and Oxygen: Makes all the difference.
Even if you buy good companies at prices that do not discount all risks - it is a bad buy. I hope that I never make this mistake knowingly again.
