A blog which periodically revisits evergreen investment principles!

Mistakes were made…

It’s always difficult to deal with mistakes even if they teach us the most about who we are & how we think. While running a diversified portfolio few one-off mistakes do get absorbed in the longer run but the mistakes still hurt.

from The New Yorker Magazine

Like Murakami saysPain is inevitable but suffering is optional‘, I got a chance to learn from one (of many) such investment mistake, which helped me deal with it in a far more constructive way.

  • Don’t ignore base rates

If an industry has a bad track record of business performance or management quality, it may be worthwhile to find exceptions but I should’ve known the reasons to accept the exceptions & kept on questioning them, which I stopped after a point.

  • Doing on the ground work doesn’t guarantee a thorough quality check. (there’s no such thing as a complete quality check)

I don’t know if I can stick my neck out & say this, but the quality of business is very hard to measure beyond obvious financial metrics. It gets even worse when the industry is fragmented & has enormous tailwind.

  • Stick with the numbers, not the management’s justifications for those numbers.

The management has an incentive to justify financial metrics. I should be skeptical about these justifications & independently decide if they seem plausible or not.

  • If you can’t recognise the business anymore, by looking at the numbers, get out.

I may have bought a piece of a business based on the expectation that the balance sheet or cash flow metrics will remain within a certain range. But if the business deviates from these & becomes unrecognisable from the original point of investing, I must re-evaluate.

  • If there’s evidence of inexplicable business practices, I should immediately refer to my notes from the original investment decision & make a decision to hold or to sell.

Sometimes the management can make unusual business choices in order to grow. May be they will work out or maybe they won’t but if after thinking through it, I’m still unable to understand why the management would make that decision, it’s time to stop taking the management’s views at face value. I must be able to walk away & live with it.


When I read through these, the errors seem fairly obvious. Some would call them rookie mistakes. The problem I had with reconciling them was that I got programmed to some extent to find ‘exceptional’ managers. The whole moat investing & intelligent fanatics bandwagon pushed me to allow for some exceptions in the selection process. Since quality of management is so hard to measure beyond obvious financial metrics, it’s tough to find a sound grounding for making a fair decision.

I don’t think there’s a mathematical formula to avoid these errors but at the same time it does raise questions about how an investment judgement evolves.

I love this quote,

Good judgement comes from experience & experience comes from bad judgement.

Now I know hope is not a good investment strategy but I hope that the above quote holds true in the longer run.


Does your Chair have your back?


Another Rate hike coming soon…


  1. Hi Raunak, amazing write up!

    I have been into Equity Research before than I entered into Business. The points you made are very much in line with my realisations after I came into the business. I am glad, that you could vet these points by experience and vicarious learnings 🙂

  2. Hi Raunak,

    Wise words for the new investors and your points are very clear. So far I was only considering the numbers as the way to measure the quality of business, and these points you have highlighted can be used as filters for my monthly portfolio review.

    Thanks again!

  3. Very well enumerated. Its important to remind ourselves of the pitfalls in equity markets which comes with its own rewards.

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