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We learn more from failures than successes. With failures, it is easy to observe the cause in hindsight and realize that we neglected a key principle in investing. With successes, the reasons vary, and it is much harder to generalize.
In the book, most of the failures stem from failing to consider implicit or explicit debt on investments. I am a sympathetic critic here, because most of my own failures in investing stem from the same flaw.
The two exceptions are the Leon Cooperman and the Madoff investors, where the problem was fraud. Fraud is tough, and there are ways to reduce the odds of being snared by it — I have written about that at my blog. It is impossible to eliminate.
But there are some defenses, look for free cash flow, and check the normalized operating accruals. Scams tend to increase accruals, and no have free cash flow.
High levels of debt are always dangerous; best for amateur and most professional investors to avoid the situations. If you can do this, you will eliminate most large portfolio failures.
Strengths of the Book
The book considers a wide range of investors. It has Wealthy Dudes, Hedge Fund Managers, Private Equity Managers, Mutual Fund Managers, Corporations, Individual Investors, and CEOs. The book considers both passive and active investors, and that is a real strength. The author aimed for generality in investing when he wrote this. He could have focused on a single area, but he didn’t.
In dealing with Geoff Grant, the author shows that he does not understand asset-backed securities that well. What happened there was that they did not understand portfolio margining, and that they could be forced to sell under tough conditions, which is a potential asset-liability mismatch.
With respect to Chris Davis and AIG, it is clear that Davis was relying on historical performance which would no longer prospectively be true. Complexity in accounting is almost always punished. Ask Mr. Buffett as to why he keeps his reserves conservative.
Who would benefit from this book: With the above caveats, I recommend this book. We learn more from failures than successes; and you could learn a lot from this book. If you want to, you can buy the book here: The Billion Dollar Mistake: Learning the Art of Investing Through the Missteps of Legendary Investors.
Full disclosure: I asked the PR flack for the book when she asked me to review his latest book, which I am still reading.
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