Learning From Losses and Gains

Musings of a VC Founder

17/12/24

Dear Diary,

We often hear investors share stories on how they learnt more from their losses than gains.

When faced with losses, especially those that were not due to impulse or misinformation, morale of the investor would be absolutely crushed. That is not to say such losses are unavoidable, there must be gaps in the investor’s judgment and cognitive sphere that ultimately led to the misjudgements.  

Experiencing losses force an investor to rethink and reconstruct his entire cognitive sphere to one that hopefully would prove to be more robust and ultimately more accurate when judging investments.

The most difficult lesson is perhaps how he would in the face of mounting losses, regain his sense of worth and confidence. Often crushing defeats can annihilate the will to fight on. How do we defend against that and regain our sense of the world?

Now, lessons are also taken from gains. Such lessons tend to be about confirmation of what works and what doesn’t. These are dangerous lessons; they may lead to confirmation bias getting sunk deep into one’s cognitive sphere and often our most unexpected losses would come from such.

How do we then meaningfully learn from our Gains? Some would say, deconstruct the entire decision-making processes and look at the variables that led to the outcome. If there are more uncontrollable variables that turned out to be positive which are not backed up by one’s cognitive sphere, perhaps the element of luck from such Gains are significant and perhaps the right lesson would be to learn how better to analyse such uncontrollable variables and risk mitigate against them turning on you.

To end this reflection I thought it is timely to reflect on two examples of men who learnt from their losses.

Paul Tudor Jones lost 70% of the monies he managed early on in his career. Such losses would have ended many investment careers.

Ray Dalio made a wrong market prediction in 1982 leading to him almost going bankrupt and losing the confidence of his investors.

Both men bounced back and as they say, the rest is history..