In a blog on Motley Fool Morgan Housel explained one of his favourite quotes comes from Nassim Taleb author of Black Swan:
"People focus on role models; it is more effective to find anti-models - people you don't want to resemble when you grow up."
He makes a good point - it pays to learn from people's mistakes as much as from their successes.
What are investors thinking when they make mistakes?
What's going through their heads?
The frame of mind that guides the biggest investment fumbles might be best summed up with a list of famous last words.
Here are some “famous last words”:
"I thought I was getting guaranteed high returns."
Everyone wants that, so no one will get it.
Any legitimately "guaranteed" investment will attract so much money that returns will be pushed down to zero -- and negative after inflation.
You aren't entitled to anything you're not willing to pay for.
"I want to get in now before I miss more of the upside."
One of the fastest roads to poor results.
Buy businesses, not regrets.
"We've come up with a new way to mitigate risk."
A line invariably muttered before meltdowns, collapses, panics, and depressions.
Overconfidence is a good alternative definition for "risk."
"We seek to enhance returns with leverage."
Alas, that leverage is seeking to enhance your humility. And it usually wins.
"It looked like easy money."
If it looked easy to you, it looked easy to millions of other investors who probably bought before you did and will get out before you do.
The easier it feels, the harder it will end.
"There's very little downside risk."
Rule of thumb: Take what you think is your maximum downside risk and multiply it by five.
Now you're closer to reality.
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"Our model has a perfect track record."
The list of models, theories, and patterns that worked until they didn't is never-ending.
Nothing can predict the future with certainty -- or even rough accuracy.
"This was a one-in-a-million event."
Maybe it was. Or maybe you severely miscalculated the odds.
Reality is almost always the latter.
"Analysts are predicting high growth for years to come."
People wouldn't take these predictions seriously if they knew how bad most analysts' track records are -- and how minimal the punishment for being wrong is.
"How can you argue with a bull market that's been going on for 10 years?"
Because all that tells us it that we're 10 years closer to the end of it than we were when it started.
"There's too much uncertainty in the world to be investing right now."
As close as it gets to ringing an opportunity bell at the bottom of a bear market.
"I'm going to wait on the sidelines until there's more clarity."
The easiest way to ensure you'll miss the bulk of bull markets.
"My brother-in-law has made a killing in these stocks. It's time I jump in."
As Charlie Munger says: "Someone will always be getting richer faster than you. This is not a tragedy."
What is tragic is taking risks you don't understand and buying assets at the top of bubbles only because you view investing as a competition with others, instead of a way to secure your own financial well-being.
"It's different this time."
A cliche among famous last words, but easily the most important.
Risk will never be eliminated, growth will never be limitless, and markets are never fully efficient.
When it comes to big, basic principles of investing, it's never different this time.
This truth explains the majority of investment blunders.
Read the rest of this great article at Motley Fool.