Postmortems amp; Premortems: what investors can learn from total losses

While it can feel a bit depressing to focus on adverse outcomes in these markets, I believe these are where the real investing lessons can be found. If we can learn from mistakes and challenging market conditions, we become better investors, and our future expected returns are much higher. So, continuing this theme, in this week’s article, I will relive a painful loss, examine a recent failure, and introduce the concept of a premortem, thinking about what might cause a company to die before it happens.

A Total Loss

One of the keys to successful long-term investing is to avoid severe adverse outcomes. It takes finding a 10-bagger to recover from a 90% loss but just a double to recover from a 50% loss. However, no such outcome is as severe as a total loss. This represents a permanent loss of capital. The reality is that there is a set of circumstances that will cause even the most apparently robust company to be a zero, and it often can happen overnight with no warning and no ability to exit a position. This is one of the reasons that investors should err on the side of greater diversification (a tendency to be overconfident...