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Learn from the fallen: Why studying failed investors makes you a better investor

Have you ever felt like following the investment gurus only to end up burnt? Been there, done that.


In my early 20s, I blindly followed the picks of “legendary investors”, assuming their magic touch would rub off.


Big mistake.


Every dollar lost is a dollar that won't grow over time. By retirement, that could easily cost me a cool million. Ouch!


Capitalism thrives on learning from mistakes, as Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp., explains in Megan McArdle's book, "The Up Side of Down." Stibel states, "The brain is a failure machine. When you're born, you have about all the neurons you'll ever have. When you're four, you have pretty much all the connections between those neurons you'll ever have. Then the brain starts pruning. The brain starts shrinking. You're actually learning by failure."


However, we don't need to fail personally to learn valuable lessons. It's far better to learn from others' mistakes than to endure the consequences ourselves.


At a conference, a teenager asked Charlie Munger for his success secrets. Munger's reply?


"Don't do cocaine, don't race trains to the track, and avoid all AIDS situations." His point was clear: success often hinges more on avoiding catastrophic errors than on making brilliant decisions.

Charlie Munger during his AGM on why studying failed investors makes you a better investor.

This is especially true in investing, where luck plays a bigger role than we realize. You might learn more from a failed investor than a superstar. Successful investors, especially the super-rich ones, often benefited from a good dose of luck. Failed investors, on the other hand, probably made mistakes you'll face too.


Forget "How to Invest Like Warren Buffett." Let's talk about "How NOT to Invest Like Lehman Brothers." These fallen giants offer valuable lessons on things like debt, the silent killer of investors.


Sure, Warren Buffett is amazing, but most of us don't have his time or resources. The real risk isn't failing to be Buffett; it's becoming Lehman Brothers. So why not learn from their mistakes?


Here's what I've gleaned from studying failed investors:

1. Debt, impatience, and insecurity are the unholy trinity of financial woes.


Many people want to impress others and achieve immediate gratification, leading them to borrow money and live beyond their means. When they inevitably encounter financial difficulties, they're overwhelmed.


Live within your means, invest for the long haul, and watch your wealth grow. You'll be miles ahead of most people.


2. Complexity is the enemy.


Finance attracts brilliant minds, and they love making things complicated. The problem? Simple is often better. Index funds and common stocks outperform fancy derivatives and leveraged ETFs most of the time.


Remember, the University of California lost millions on a complex investment, while Warren Buffett made a fortune on a Nebraska farm. Keep it simple.


3. Panic is a recipe for disaster.


Deep Survival by Laurence Gonzalez tells the story of survivors in plane crashes and blizzards. The key? They didn't panic.


Investing is the same. I've seen people make smart choices for years, only to lose it all during a market crash. Any decision made with a racing heart is likely one you'll regret.


Napoleon defined a military genius as "the man who can do the average thing when all those around him are going crazy." The same holds in investing.


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