Failure Is Essential

None of us start out knowing how to do things. Failure is an essential part of learning how to do things. But somehow when we try something new it often feels like we should be instantly proficient. Because of this, many of us are reluctant to try things that are new to us — especially when it comes to our money.

We worry that we’ll do it wrong, and so we don’t even really investigate our options. Or we may get started with something and then give up when we encounter difficulties or get frustrated at the speed of our progress.

While I’m not recommending jumping on every new thing that comes along (especially not without thoroughly investigating the risks), I do think it’s wise to consider options that may be new-to-us. After all, there’s always a first time for things like renting an apartment, buying a house, opening an IRA, etc.

When we try things that are unfamiliar to us, we should persist long enough to make sure that we really understand what we are doing. Not being an instant success is no reason to give up.

As an example, if I had based my stock-picking abilities on my Freddie Mac pick, you can bet I’d have concluded that investing in single stocks wasn’t for me. (I have about a 94% paper loss on that stock at the time of this writing.)

But I didn’t let that early mistake stop me. Instead, I analyzed where I went wrong in picking that stock. (I allowed myself to be influenced by an expert whose reasoning made sense, bought the stock even though it didn’t have my definition of a “pretty chart”, and bought a disproportionate amount of the stock because I got greedy.)

In other words, instead of giving up based on that big mistake, I decided that it was normal to make some mistakes and that the important thing was to learn from them and hopefully not make them again.

But what if Freddie Mac had shot through the roof after I bought it? The reverse is also true: It isn’t wise to automatically attribute great results to instant expertise. Surely I was not an expert after buying just a few stocks.

In fact, currently one of my stocks is up about 502% from when I bought it. If I had based my stock-picking abilities on that pick, I might have (erroneously) concluded that I was a stock picking expert. Instead, I analyzed what I did right with that stock. (Recognized that it was speculative, bought only a very small amount, analyzed its prospects, and got lucky.)

In both cases (and all of the cases in between) I recognized that becoming good at things almost always takes time. Since I learn best by doing, I thought of my first year’s worth of stock picks as tuition. I also limited the amount I invested each month, and spent a lot of time reading books related to investing in stocks. I’d thought of doing something similar using a stock-picking game, but I do better when the risks and returns are real.