Investing is, by nature, an ongoing exercise in navigating uncertainty. At its core, every investment decision involves peering into an unknowable future.  Even investors armed with the best research, analysis, judgment and comprehensive due diligence cannot guarantee outcomes.  It is just not possible.

This inherent uncertainty forms the bedrock of the relationships between risk, mistakes, failures and success in investing.

It is easy to confuse the outcome of taking a risk with a mistake or personal genius.  Luck (both good and bad) plays a much bigger role in investing than we care to admit.

It is only when we can clearly distinguish between risk and mistakes that we could reduce the emotional impact of assessing our results.

Risk: the necessary bit

The future is always uncertain – no matter what market commentators want to make us believe. When you make an investment, you must accept this uncertainty.  In fact – the best investors actively embrace this uncertainty.  To pursue higher or better returns, one must accept some level of risk. As Gen-Z would say; that is a feature, not a bug.

A negative outcome, such as a subpar return or capital loss from a specific investment, is not a mistake; it’s a consequence of the risk taken. In the same vein – a positive outcome of a risk taken is not a sign of the investor’s genius.

The outcome of a risk taken, by definition, cannot be “fixed” or “corrected” going forward.

Every new investment comes with taking another risk. It can be mitigated through diversification, position sizing, and alignment with your time horizon, but you cannot eliminate risk without forgoing potential rewards.

Importantly, one of the many risks one takes in investing is the risk of making a mistake.

Mistakes: the fixable flaws

Mistakes come from errors in analysis, process, or investor response to external stimuli. These are not inevitable; they stem from lapses in thinking or behaviour.

Common mistakes include flawed analysis or assumptions, not following the mandate and taking risks mismatched to your investment DNA or personal levels of risk tolerance; an aggressive investor investing more conservative could be merely frustrating, but a conservative investor venturing into high-volatility stocks without preparation is a recipe for disaster.

Other mistakes include: *

  • Emotional decision-making (selling in panic during downturns or buying on euphoria);
  • Overconcentration in single ideas;
  • Falling in love with a holding;
  • Hubris, overconfidence in one’s own abilities and
  • Impatience, which can lead to excessive trading, eroding returns via fees.

* Not a comprehensive list

The key differentiator is that mistakes are fixable. One can learn from them and improve future decision-making.

Failure: cumulative & compounded mistakes

Failure in investing manifests as persistent bad performance or permanent capital loss. Well-managed risks seldom cause failure. Even individual mistakes are normally bearable.  Mistakes that are ignored lead to ruin.

Consider Long-Term Capital Management (LTCM), the hedge fund that collapsed in 1998. Their mistake wasn’t embedded in market risk—it was excessive leverage and over-reliance on statistical models assuming low correlations, which failed during the Russian crisis. This was an avoidable risk; it was a process flaw in risk management.

Recognising when an investment or an investor is on its path to failure is always tricky – until it is too late. During periods of underperformance, investors often rationalise it as temporary risk playing out—”the thesis is intact, value will unlock soon.”

Dogmatic behaviour tends to mask compounding mistakes, like doubling down on losers without reassessment. Failing to recognise when one is right for the wrong reasons also fits into this category.

For all of us as investors, this is the part we must monitor with the most honesty and vigilance.

Be clear in your own mind

To help us in making our investment decisions for our fund we use the following framework:

  • Risk is the unavoidable, accepted unknown that comes with every decision to commit capital.
  • Mistakes are avoidable errors in process or judgment.
  • Failure is the result of mistakes that compound.

So

  • Since it cannot be avoided, embrace risk with discipline.
  • Eradicate and learn from mistakes through honest review.
  • Vigilantly monitor for failure’s early signs. (The most difficult part!)

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