Insanity: doing the same thing repeatedly, hoping to get a different result

By DAVID MOON, Moon Capital Management
April 10, 2005

After inventing the incandescent light bulb, Thomas Edison gave credit to tenacity, not brilliance: 'I had simply exhausted all possible avenues of failure.' Fortunately for those of us who enjoy a good light bulb from time to time, Edison's genius was in his refusal to make the same mistake twice.

It's a shame Edison did not require each of us to master this ethic before being allowed to flip a light switch, or make an investment.

In 1983 little Knoxville, Tenn., was home to the fourth largest bank failure in the history of the United States. Long-time residents don't need a history lesson. It was a big deal.

A dozen years later, the suicide of a Knoxvillian revealed an old-fashioned Ponzi scheme, costing East Tennesseans up to $50 million. Many of the victims of the Ponzi scheme had also been victims of the bank failure.

A number of these two-time fraud victims ended up in my office, asking for help. All were well-educated, intelligent and worldly. They each put nouns and verbs in their sentences and none of them had a 'kick me' sign taped on their backs.

But you couldn't tell from their experience ' or their subsequent actions.

Not a single one of these individuals ever asked about my firm's disciplinary history or status with regulators. They didn't ask about custody, insurance or if I had a private jet and a home in the Caymans. They did not accept my offer to have their attorney or accountant meet with us or review our contracts and disclosure documents.

This is, of course, how they became victims twice before. Fortunately, they did not a third time, but it was only fate that protected them, not their accumulated expensive experience.

Why do some people repeatedly make the same mistakes while others use their errors as learning experiences?

We all make mistakes, so don't think your portfolio is immune to mortal frailties. Investors should heed the advice my father gave me: 'Son, if somebody's going to kick your butt, you better at least learn something from it.'

Wall Street is going to kick your butt regularly. You get to decide if you're going to learn from those experiences or remain vulnerable to the same class bully. Why do some people learn after one beating, while other investors do the equivalent of leading with their chins over and over again?

German researcher Christopher von Bülow has studied and written about the habit of some people to act repeatedly in a way that is detrimental to their interests. This behavior is the result of beliefs and routines that no longer hold any positive logic, if they ever did. If you happen to make money on a stock tip from your brother-in-law, it increases the likelihood that you will listen to him again. If it happens twice, you may be willing to ignore all logic and investment fundamentals and take the advice of a guy whose opinion you don't respect on any other topic.

The next time you lose money on an investment, don't blame it on fate or your brother-in-law. Determine the mistake you made and why you made it. Then don't do it again.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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