The Wall Street Journal has been chock-full of teachable moments lately. Last week we pointed readers to two pieces that highlighted the risk of investing in low-barrier to entry businesses. This week the journal brings us two pieces that should make it crystal clear why diversification is so vital to your long-term investment success.

The subject of both WSJ articles is activist investors. Activist investors often take out-sized positions in stocks and then agitate the board for change to increase shareholder value.

Casablanca is an activist hedge fund that took a 5.2% stake in Cliffs Natural Resources last year. Cliffs is an iron ore and coking coal miner. Casablanca was successful in putting in place a handpicked CEO who aggressively cut costs and closed Cliff’s worst mines. That didn’t help Cliffs shares though.

According to the WSJ, Casablanca’s costs on its Cliffs position was $25 per share. The hedge fund was anticipating a double in the stock. What it got was close to a complete wipe out. Cliffs shares now change hands for $2.83—a 90% loss.

Bill Ackman’s Pershing Square Capital is the subject of the second article. You may be familiar with Mr. Ackman. He had a fairly public dispute with Carl Icahn—who some might call the original activist investor—over Herbalife. Ackman claims it is a fraud and has shorted the stock. Icahn owns almost 20% of the shares. Icahn has been right so far.

Mr. Ackman is also one of the largest owners of Valeant Pharmaceuticals. Valeant has been front page news in the financial press recently, so I won’t rehash what ails the stock other than to say that the threat of a government crackdown on aggressive drug pricing strategies and suspect accounting practices haven’t been good for business.

Mr. Ackman has been publicly bullish on Valeant and he defended his position even after the stock sold off on claims of accounting fraud. Mr. Ackman was so confident in his Valeant position that he invested as much as 20% of his fund’s assets in the stock.

Valeant was trading near $200 per share when Ackman was building his position in March of this year. The stock closed at $78.77 yesterday—a loss of about 60%.

valeant and cliffs

I don’t point out the losses that Casablanca and Pershing square suffered to pile on. I point out the losses because there is a lesson here that can help you become a more successful investor. The lesson is that if even activist investors who have deep knowledge (in some cases inside knowledge) of the companies they are investing in can get it wrong, so too can any other investor. As shocking as this may sound, that even includes us 😉 .

The reality of the investment business is that most portfolios are going to have a couple of disasters and a couple of big winners. The problem is that you don’t know which is which beforehand.

Recovering from a 90% loss or even a 60% loss on a quarter of your portfolio is no easy feat and it can take an even greater toll emotionally. That makes proper diversification vital to any serious long-term investment strategy. A strong dose of humility can help too.