The glory in learning from your mistakes... It's about what not to do... The market is a loser's game... Controlling risk with a margin of safety... What the thoughtful investor does differently...
Learning you're wrong can be glorious...
Maybe you get a quick, hot flush of embarrassment when you're wrong. Maybe you get a sense of disgust if it's a mistake you've made before. Maybe you're doing something complicated and difficult, and you've been bludgeoned with repeated errors.
None of that feels good. Success feels good. Big paydays, promotions, and falling in love feel good.
Unfortunately, those aren't the things we learn from.
When you recognize and recover from the blow of a mistake, you've learned something. You've been shown the way not to go.
If you can see mistakes as learning opportunities, you're like the rustic the late, great Charlie Munger cited so often in his work, who is purported to have said, "I wish I knew where I was going to die, and then I'd never go there."
It sounds silly, but it reflects a profound insight I've mentioned before. It's called "via negativa" – that the learning of life is about what to avoid. From that perspective, learning what to avoid is a glorious triumph.
Especially in a losing game...
As I wrote last week, investors must learn the core skills of recognizing, understanding, and controlling risk – what to avoid. It's a negative art. Portfolio manager and author Charles Ellis wrote a whole book about this idea, called Winning the Loser's Game. He likened investing to an amateur tennis match, in which the person who makes the least mistakes wins.
That's different than the pros, who win by making better shots than their equally highly skilled opponent. They win by being more right. Amateurs win by being less wrong.
To be clear, Ellis' book was aimed primarily at professional investors, who, on average, tend to underperform the market.
I'm unaware of any pro tennis players turned professional investors, but five-time national squash champion Victor Niederhoffer (who died on August 4, at the age of 82) was also a famous speculator who once worked for George Soros.
Niederhoffer went out on his own and made investors an average return of 28% a year from 1987 to 1997. In his excellent 1997 book, The Education of a Speculator, he wrote...
In statistical terms, I figure I have traded about 2 million [futures] contracts, with an average profit of $70 per contract (after slippage of perhaps $20). This average is approximately 700 standard deviations away from randomness.
Niederhoffer wasn't playing the game by trying to avoid mistakes. He was trying to score big points using leverage and very actively trading derivatives. And for a while, he was great at it.
Now, when you're swinging for the fences, you had better learn to cut losses short, or you'll go broke quickly. Niederhoffer's extremely high-frequency trading style meant that he was constantly taking losses. When he worked for Soros at the Quantum Fund, Soros even nicknamed him "loser" due to all of his losses. The moniker eventually became less ironic and more literal...
The market finally outplayed Niederhoffer on October 27, 1997.
He had heavily sold put options on Thai banks and the S&P 500 Index during the Asian financial crisis, in the belief they'd soon recover. He was using big leverage, so when U.S. stocks dropped 7% that day, he lost $130 million – nearly his entire personal fortune, along with client money. He had to sell his antique silver collection, which was second only to that of the Metropolitan Museum of Art.
Niederhoffer didn't bask in the gloriousness of learning he was wrong. As I recall, he got quite depressed and didn't work again as a fund manager for several years.
He must have learned something, because he found success again as a fund manager... before getting caught up in the 2007 to 2008 financial crisis. He once again lost a bunch of money and had to close his fund. I don't know if he traded professionally after that. But I guess he never really learned to change his basic view about using leverage and taking big risks. If only he'd basked in the gloriousness back in 1997.
Niederhoffer was a brilliant guy, but he didn't appreciate that the market is a loser's game for everybody, professional and amateur investors alike. Everyone in the market either learns risk avoidance or loses big.
That's why you need to see mistakes as glorious opportunities for learning. You can't avoid them. So learn from them. But don't just learn. Bathe in the gift you've been given.
Risk avoidance came up again this week...
On Wednesday, I spoke with Firebird Management co-founder Harvey Sawikin about many things, including avoiding risk. We talked about some ways folks can identify risk in the stock market, referring specifically to his recent Substack essay titled, "Do I Know a Bubble When I See One?"
I told Harvey something I've told Digest readers a bunch of times. I don't predict tops and bottoms. That's not the purpose of thinking about whether the market is very expensive or filled with more speculative activity than usual. It's about assessing risk.
Still, Harvey is great at both. He bought shares of a Dutch data-center company that would eventually be named Nebius for $7.50 a share back in 2024, right after it separated from its parent company, Russia-based Internet search provider Yandex.
The stock rose 34% as we spoke on Wednesday after a blowout earnings report. It closed at around $259 per share – a 34-fold return in less than two years.
The thing is, Harvey was able to buy the stock at a bargain price only because the funds holding Yandex only wanted to own Yandex. When the companies split, funds had to sell their Nebius shares. Nebius was highly illiquid back then, but Harvey bought as much as he could. It eventually listed on the Nasdaq, and today it's a highly liquid $75 billion market-cap company.
It wasn't just a great opportunity that turned into a multibagger...
It's a great example of how Harvey controls risk.
You see, when Harvey's firm started buying Nebius' stock, Nebius owned one of the biggest data centers in Europe. It had $2 billion in cash and no debt, yet the market cap was just $1.5 billion.
So Harvey bought a pile of cash at a 25% discount and got all the company's remaining assets for free. The valuation assigned zero value to the business, which owns a giant data center amidst an AI-fueled bull market.
Harvey had what value guru and Warren Buffett's mentor Benjamin Graham would call a large margin of safety. Graham discussed this idea in the final chapter of his 1949 classic, The Intelligent Investor. That chapter alone is reason enough to own the book.
As Graham said...
The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities. We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other. That difference is the safety margin. It is available for absorbing the effect of miscalculations or worse-than-average luck.
As Graham says, this margin of safety can "[render] unnecessary an accurate estimate of the future." That echoes my own mantra of, "Prepare, don't predict."
Now, it's important to note that...
The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.
Stocks trading today for 10, 20, or more times sales (and perhaps don't even earn a profit) provide you with zero margin of safety.
Graham goes a step further and says that without a margin of safety, you're not even investing...
[To] have a true investment, there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.
Harvey told me the stocks in his portfolio trade at an average of 9 times earnings. That's a lot cheaper than the S&P 500 at 30 times earnings. It's easy to see how Harvey is truly investing compared with folks simply holding S&P 500 funds.
While learning from your mistakes is a wonderful opportunity, I have to admit that I'd rather use every available method of reducing errors, rather than suffer the potential damage one might cause. Margin of safety will do that for you.
Nowadays, it's hard to find stocks you'd actually want to own trading at discounts to their cash holdings...
To ferret them out, you have to be like Harvey, rummaging through the exchanges of a few dozen Asian and European countries, looking at companies nobody has ever heard of before, and will probably never hear about if you don't tell them. Few people are willing to work that hard, and I don't blame them.
As we pointed out last week, there's another rather simple (if emotionally difficult) way to get a margin of safety. It's not a trading strategy or an analytical skill. It's simply the mastery of time.
A long-term perspective will allow you to maximize the effects of compounding. Many investors have done exactly that by holding index funds in their 401(k) accounts over the past few decades.
My Stansberry colleague and friend Bryan Beach likes to point out that many people with 401(k) accounts seem as though they don't even know they're invested in the stock market. That ignorance has made them a ton of money over the past few decades, with the S&P 500 up more than 70-fold since 1980.
I'm not saying vapid ignorance is a margin of safety... but mindless buying and never selling has worked beautifully for millions of Americans.
Still, there's a happy medium between the veteran fund manager scouring Eastern European markets for deep value and the American worker who doesn't know he's in the market.
We'll call him the thoughtful investor...
Graham used the final paragraphs of The Intelligent Investor to list four principles of businesslike investing, which all boil down to knowing your business. The thoughtful investor can take that two ways.
First, he knows the business of investing. He knows how to avoid putting too much money into a single stock, how to avoid speculative garbage, and how to build a portfolio around high-quality, cash-gushing businesses with large competitive advantages. He understands whether he's making a short- or medium-term trade or investing for the long haul.
Second, he understands the businesses he owns in his stock portfolio. He knows what they do, and if he can't understand what they do, he doesn't buy them. He understands the price he's paying relative to the business's sales, profits, and future prospects. Just as he understands his own financial condition, he understands the business's balance sheet.
Finally, as a regular Friday Digest reader, the thoughtful investor tries to stay aware of all he doesn't know.
That includes enough self-knowledge to appreciate what the late Donald Rumsfeld, former Secretary of Defense, would call known knowns, known unknowns (things you know you don't know), and unknown unknowns (things you're unaware of that you don't know).
And when all that self-, business, and investing knowledge isn't enough to avoid errors, the thoughtful investor enjoys the glorious feeling of learning something new when he's wrong.
New 52-week highs (as of 8/13/26): Amgen (AMGN), Pacer U.S. Cash Cows 100 Fund (COWZ), Dexcom (DXCM), iShares MSCI Japan Index Fund (EWJ), Franklin FTSE Japan Fund (FLJP), Cambria Foreign Shareholder Yield Fund (FYLD), GCM Grosvenor (GCMG), Global Payments (GPN), Helmerich & Payne (HP), Hewlett Packard Enterprise (HPE), Korn Ferry (KFY), VanEck Morningstar Wide Moat Fund (MOAT), Marathon Petroleum (MPC), Cloudflare (NET), NewMarket (NEU), Okta (OKTA), Palo Alto Networks (PANW), Invesco High Yield Equity Dividend Achievers Fund (PEY), Starbucks (SBUX), State Street SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 (SSO), Twist Bioscience (TWST), and Valero Energy (VLO).
In today's mailbag, feedback on inflation, which we covered yesterday... and more thoughts on the labor market, which we covered in Monday's edition... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"What no one talks about regarding inflation is that during periods of inflation, the inflated prices become the new normal and that causes pain until wages catch up. The 'new' price of a 12-pack of coke is now around $7.99. In late 2019 that same pack was around $3.99. That's 100% total inflation. The average household is suffering and cutting back. Eventually this will break the economy." – Subscriber Ted B.
"You seem to think that the loss of jobs was a negative. In fact if you look closer at the data, the majority of the job losses were government jobs. To me that is a positive as it is a sign of government shrinking." – Subscriber Michael R.
Good investing,
Dan Ferris
Medford, Oregon
August 14, 2026
