The idea of learning from the successes of great investors is widely accepted as a great example of applying deliberate practice to the investing sphere. For example, Eddie Lampert, prior to founding his hedge fund, reverse engineered some of Warren Buffett's best investments. Certainly, doing this makes sense, as it allows one to develop a mental model that can be applied to future situations. Yet, as Charlie Munger says, we should always invert. So, how does one go about inverting reverse engineering? It is simple: rather than just analyzing their successes, why not analyze their failures as well. For as Charlie Munger says:
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."
And as Warren Buffet says:
"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."
On second thought however, it is much easier to find great investment that can be reverse engineered versus mistakes. The reason for this is the fact that every investor would much rather discuss their successful positions, as opposed to loss-making positions. This is human nature. The media also prefers to write about success rather than failure (unless it can be vilified, of course). To illustrate, consider the number of articles published on the topic of David Tepper's investments in various securities issued by major financial institutions during the doldrums of 2009, in comparison to the volume covering the opposite side of the trade. Despite these factors, with work, unprofitable investments can be found and analyzed. Thus, the goal of this series is to reduce the amount of work, you, the reader must do.
To begin, embedded below is a presentation from Richard Pzena titled "Evaluating Financials In a State of Panic." For the purpose of background, in late 2007, Pzena Investment Management created positions in the common stocks of large financial institutions. In particular, the firm acquired shares in Fannie Mae (FNM, Financial), Freddie Mac (FRE, Financial), and Citigroup (C, Financial). Over the next year or so, these positions had a disastrous effect on the performance of his funds, with losses exceeding 50%. Yet, he was not the only great investor to buy these stocks just prior to midnight. Bill Miller of Legg Mason was also a vocal supporter of these stocks at the same time. So, how and where did they go wrong? Where have other great investors gone wrong? That is the goal of this series.
Evaluating Financials In State of Panic
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."
And as Warren Buffet says:
"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."
On second thought however, it is much easier to find great investment that can be reverse engineered versus mistakes. The reason for this is the fact that every investor would much rather discuss their successful positions, as opposed to loss-making positions. This is human nature. The media also prefers to write about success rather than failure (unless it can be vilified, of course). To illustrate, consider the number of articles published on the topic of David Tepper's investments in various securities issued by major financial institutions during the doldrums of 2009, in comparison to the volume covering the opposite side of the trade. Despite these factors, with work, unprofitable investments can be found and analyzed. Thus, the goal of this series is to reduce the amount of work, you, the reader must do.
To begin, embedded below is a presentation from Richard Pzena titled "Evaluating Financials In a State of Panic." For the purpose of background, in late 2007, Pzena Investment Management created positions in the common stocks of large financial institutions. In particular, the firm acquired shares in Fannie Mae (FNM, Financial), Freddie Mac (FRE, Financial), and Citigroup (C, Financial). Over the next year or so, these positions had a disastrous effect on the performance of his funds, with losses exceeding 50%. Yet, he was not the only great investor to buy these stocks just prior to midnight. Bill Miller of Legg Mason was also a vocal supporter of these stocks at the same time. So, how and where did they go wrong? Where have other great investors gone wrong? That is the goal of this series.
Evaluating Financials In State of Panic
