A recent visit with a prospective client has prompted me to share a couple of stories.
In 2008 John Paulson, a little known hedge fund manager, became one of the most famous names on Wall Street. While the rest of the world was being crushed by the financial collapse, Paulson was raking in a record $3.2 Billion after accurately predicting the subprime mortgage collapse. John quickly became one of the most sought after advisors in the world, with a book, “The Greatest Trade Ever Made” highlighting his brilliant move.
So where is John Paulson now? During the three years following his famous prediction, while the rest of the equity markets were enjoying a solid rebound, the hedge fund Paulson managed lost over 72% of its value. Recently he was in the news again because last year he moved the bulk of his client’s money into gold, just before the record collapse in the metal’s price. So much for brilliance.
In 2007, a then relatively unknown Meredith Whitney wrote a stinging report on problems at Citibank. When her words proved to be accurate, she was catapulted to the top of the investing world, being pronounced by Forbes magazine in their October 2007 issue as the "Second best stock picker in the Capital Markets." Meredith's great prediction brought her enormous attention.
In December of 2010 she made another bold prediction, declaring that over $100 billion in municipal bonds would default over the next 12 months. Immediately markets reacted and bond investors lost billions, not to defaults, but to panic selling. When her prediction failed to materialize, Whitney quickly went from being the hero of Wall Street investors to the butt of their jokes.
In contrast, take a look at the world’s most famous investor, Warren Buffet. Despite his lifelong success in investing, Buffet is known for his humility, but he wasn’t always that way. Many do not realize that his fund Berkshire Hathaway, is actually named after his biggest blunder. Recently Buffet revealed that the 1964 purchase of Berkshire Hathaway Textile Company, which was made in a fit of arrogance, likely cost his investors about $200 Billion in lost earnings. The very name of Buffet’s fund stands as a constant reminder that in investing, pride can be costly.
As I have reviewed the careers of the great investment professionals over the years, I have noticed a similar trend of humility. The ones who last, like Buffet, combine long hours of hard work with a healthy dose of reality about their own abilities. They realize that in the end, no one can predict with certainty whether a stock will go up or down, just as no one knows for certain whether it will rain tomorrow. We can predict, but cannot know, the future.
One of an investor’s most desirable qualities, is a sense of humility about their own abilities. Investing can be enjoyable and profitable if done with wisdom, caution and prudence. But once pride enters the scene, beware of the fall.