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What I Learned Losing a Million Dollars
Jim Paul's meteoric rise took him from a small town in Northern Kentucky to governor of the Chicago Mercantile Exchange, yet he lost it all—his fortune, his reputation, and his job—in one fatal attack of excessive economic hubris. In this honest, frank analysis, Paul and Brendan Moynihan revisit the events that led to Paul's disastrous decision and examine the psychological factors behind bad financial practices in several economic sectors.
This book—winner of a 2014 Axiom Business Book award gold medal—begins with the unbroken string of successes that helped Paul achieve a jet-setting lifestyle and land a key spot with the Chicago Mercantile Exchange. It then describes the circumstances leading up to Paul's $1.6 million loss and the essential lessons he learned from it—primarily that, although there are as many ways to make money in the markets as there are people participating in them, all losses come from the same few sources.
Investors lose money in the markets either because of errors in their analysis or because of psychological barriers preventing the application of analysis. While all analytical methods have some validity and make allowances for instances in which they do not work, psychological factors can keep an investor in a losing position, causing him to abandon one method for another in order to rationalize the decisions already made. Paul and Moynihan's cautionary tale includes strategies for avoiding loss tied to a simple framework for understanding, accepting, and dodging the dangers of investing, trading, and speculating.
This book—winner of a 2014 Axiom Business Book award gold medal—begins with the unbroken string of successes that helped Paul achieve a jet-setting lifestyle and land a key spot with the Chicago Mercantile Exchange. It then describes the circumstances leading up to Paul's $1.6 million loss and the essential lessons he learned from it—primarily that, although there are as many ways to make money in the markets as there are people participating in them, all losses come from the same few sources.
Investors lose money in the markets either because of errors in their analysis or because of psychological barriers preventing the application of analysis. While all analytical methods have some validity and make allowances for instances in which they do not work, psychological factors can keep an investor in a losing position, causing him to abandon one method for another in order to rationalize the decisions already made. Paul and Moynihan's cautionary tale includes strategies for avoiding loss tied to a simple framework for understanding, accepting, and dodging the dangers of investing, trading, and speculating.
190 pages, Hardcover
First published January 1, 1994
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Displaying 1 - 30 of 354 reviews
September 3, 2020
The author of The Black Swan said this was the best book on finance that he had ever read so I thought I would give it a read too. Short read and well written. Instead of another financial "how to succeed on Wall Street" book, it is an analysis of failures and through these seldom talked about events there is much to learn.
May 7, 2013
I would like to start by saying that this is probably the best investing book I have ever read. I have read plenty of others that basically say the same thing as every other one that I have read. Most books cover what they think is the best way to make money while not touching on any of the negatives of the stock market. This book does the exact opposite. It's basically the story of a man who got lucky and was so full of himself that he lost it all when his luck ran out. He goes into great detail about his life and how he built his fortune and the tragic fall that occurred shortly after.
It's a fascinating story and quite an important lesson that can apply to everyone in any business. I really enjoyed that this book goes and tries to teach people what can go wrong and how to act on a losing investment position. Overall this was a fantastic book that I think can benefit any reader, not just investors.
It's a fascinating story and quite an important lesson that can apply to everyone in any business. I really enjoyed that this book goes and tries to teach people what can go wrong and how to act on a losing investment position. Overall this was a fantastic book that I think can benefit any reader, not just investors.
March 7, 2017
This book is brilliant and essential reading for anyone interesting in trading. Instead of praising it further, I’ll spend the rest of the review summarising the book (somewhat for my own sake). Its split into two distinct parts: story and analysis. In the story, the author describes his love of money and his time as a broker, becoming fairly well-off before losing it all in the market in a few trades as his luck ran out. Not an especially unusual story, but what comes next is, as the narrator tries to understand why he lost and what can be done to rectify things. In the analysis, he describes the two components of winning at trading: analysis that is able to find value, and applying the method. The book is concerned with the latter, involving psychological issues, which itself can be divided into pathological disorders (degeneracy, gambling addiction) and the normal, everyday emotions felt by folks who gamble. The book only deals with the latter, as you would expect.
The analysis is divided into four chapters: mental processes, behavioural characteristics, crowd-like behaviour, and steps to take. Chapter 6 on mental processes describes how losses can be internal and external; internal losses are personalised, affecting people’s emotions, while external losses can be analysed dispassionately. We do this because we tend to equate a win as being right and a loss as being wrong, which is an unhelpful way to think of things. The author describes what he calls the Five Stages of Loss, and a distinction is made between discrete events (which have a defined end) and continuous events (which don’t have a defined end). Chapter 7 describes the five categories of people who risk money: investors, traders, speculators, bettors, and gamblers, the difference depending more on behavioural characteristics rather than which product or technique is used. Chapter 8 describes the crowd-like behaviours seen in markets and how they can affect the individual trader. The last chapter provides practical instruction on how to improve trading, such as “(1) Decide what type of participant you’re going to be, (2) select a method of analysis, (3) develop rules, (4) establish controls, and (5) formulate a plan.” The book can be summed up in the following sentence: “Learning how not to lose money is more important than learning how to make money.”
The analysis is divided into four chapters: mental processes, behavioural characteristics, crowd-like behaviour, and steps to take. Chapter 6 on mental processes describes how losses can be internal and external; internal losses are personalised, affecting people’s emotions, while external losses can be analysed dispassionately. We do this because we tend to equate a win as being right and a loss as being wrong, which is an unhelpful way to think of things. The author describes what he calls the Five Stages of Loss, and a distinction is made between discrete events (which have a defined end) and continuous events (which don’t have a defined end). Chapter 7 describes the five categories of people who risk money: investors, traders, speculators, bettors, and gamblers, the difference depending more on behavioural characteristics rather than which product or technique is used. Chapter 8 describes the crowd-like behaviours seen in markets and how they can affect the individual trader. The last chapter provides practical instruction on how to improve trading, such as “(1) Decide what type of participant you’re going to be, (2) select a method of analysis, (3) develop rules, (4) establish controls, and (5) formulate a plan.” The book can be summed up in the following sentence: “Learning how not to lose money is more important than learning how to make money.”
June 19, 2021
Part 1 is autiobiography. Part 2 is business book. Most reviews on goodreads think that part 1 can be skipped. This is exactly wrong! Part 1 is entertaining and edifying. You get a first hand account of how a fancy business guy thinks. Part 2, being a business book, is either commonsense or wrong or unactionable.
Brendan Moynihan's story telling reminds me of Richard Feynman. Unpretentious. Erring on the side of overly simple descriptions of personal motivation and psychology, which often reads as child-like but is quite charming.
Moynihan's adventures also remind me of Kevin Mitnick. Here's this smart guy who can achieve marvels when he sets his mind to it. But he realises that most of the time it's easier to get what you want by shenanigans than by following official channels, so ends up cheating and lying a lot.
For example, Moynihan wants a job in finance. He manages to talk to someone who needs an assistant. When asked what he knows about the industry, he permutes a few buzzwords he heard once. He's told there will be aptitude tested tomorrow. He manages to get the name of the test out of a secretary, then immediately buys a book which describes the test and reads it so he can ace the test the next day. He gets the job and is great at it.
And what was the subject of the test that Moynihan cheated on? It evaluated aptitude for business by testing how much a candidate is willing to sacrifice ethics and ideals for money and success.
The Big Idea That Explains Everything in part 2 is that the key to success is not to take successes and failures personally. If you take successes personally then you think you're immune to failure. If you take your failures personally then you think you're doomed. This seems obvious to me. From the other Goodreads reviews it seems there are some other obvious points made, but I skipped over most of this section.
"If you can't do something, pay someone else who can and don't worry about it."
There's a nice bit where he describes going through a bunch of books about investing and describes how they all disagree with one another.
Brendan Moynihan's story telling reminds me of Richard Feynman. Unpretentious. Erring on the side of overly simple descriptions of personal motivation and psychology, which often reads as child-like but is quite charming.
Moynihan's adventures also remind me of Kevin Mitnick. Here's this smart guy who can achieve marvels when he sets his mind to it. But he realises that most of the time it's easier to get what you want by shenanigans than by following official channels, so ends up cheating and lying a lot.
For example, Moynihan wants a job in finance. He manages to talk to someone who needs an assistant. When asked what he knows about the industry, he permutes a few buzzwords he heard once. He's told there will be aptitude tested tomorrow. He manages to get the name of the test out of a secretary, then immediately buys a book which describes the test and reads it so he can ace the test the next day. He gets the job and is great at it.
And what was the subject of the test that Moynihan cheated on? It evaluated aptitude for business by testing how much a candidate is willing to sacrifice ethics and ideals for money and success.
The Big Idea That Explains Everything in part 2 is that the key to success is not to take successes and failures personally. If you take successes personally then you think you're immune to failure. If you take your failures personally then you think you're doomed. This seems obvious to me. From the other Goodreads reviews it seems there are some other obvious points made, but I skipped over most of this section.
"If you can't do something, pay someone else who can and don't worry about it."
There's a nice bit where he describes going through a bunch of books about investing and describes how they all disagree with one another.
October 2, 2019
Very helpful for understanding the psychology behind trading. Might have to take it into account so I make less losses.
September 22, 2014
Audiobooked this because two of my absolute fav know entities, N. N. Taleb and Tim Ferriss, loved it. It's solid, short and I think will definitely help me in my personal investing and self evaluation. If you liked getting into a trader's head with something like Reminiscences of a Stock Operator or More Money than God definitely queue this up.
June 30, 2018
Anybody looking to invest in stock market should read this. Don't need to finish the whole book, the first half gives you already a great idea about how to avoid classic mistakes.
October 21, 2015
I really enjoyed this - I've been liking books that incorporate psychology and economics/business lately. This one does that.
A few notes (some taken directly from the book):
* You wouldn't read a book on heart surgery and think you can perform heart surgery; why do people assume the same with investing/trading? People think its easier than it is, and mistake luck for skill.
* Experts have learned that losing is part of the process, and they get good at losing too.
* People lose because of psych. factors, not analytical ones. They personalize the market and their positions (ch 1-4), internalizing what should be external losses (ch 6), confusing the different types of risk activities (ch 7), and making crowd trades (ch 8). Is there a single factor common to all of these errors, and can we determine a way to address that factor in order to avoid the errors
* Every deal we every did had a "back door" - another example about the need for a stop loss aka exit strategy. Apply the positive attributes of a game to business and the markets. Just as there are many ways to make money in the markets, there are many ways to make money in business. Sam Walton made his money one way, and Gucci did so very differently. There is a common denominator - rather than just taking risks they excel at judging, minimizing, and controlling risk.
A few notes (some taken directly from the book):
* You wouldn't read a book on heart surgery and think you can perform heart surgery; why do people assume the same with investing/trading? People think its easier than it is, and mistake luck for skill.
* Experts have learned that losing is part of the process, and they get good at losing too.
* People lose because of psych. factors, not analytical ones. They personalize the market and their positions (ch 1-4), internalizing what should be external losses (ch 6), confusing the different types of risk activities (ch 7), and making crowd trades (ch 8). Is there a single factor common to all of these errors, and can we determine a way to address that factor in order to avoid the errors
* Every deal we every did had a "back door" - another example about the need for a stop loss aka exit strategy. Apply the positive attributes of a game to business and the markets. Just as there are many ways to make money in the markets, there are many ways to make money in business. Sam Walton made his money one way, and Gucci did so very differently. There is a common denominator - rather than just taking risks they excel at judging, minimizing, and controlling risk.
December 28, 2015
As most of people here I came to this book from reference in Black Swan by Nassim Taleb. As he says: "The best noncharlatanic finance book I know is called What I Learned Loosing a Million Dollars". As a great Taleb's fan I obviously reached for this book.
In short - the book is awesome. It's basically the often missing Silent evidence. It's rare to see a book that describes personal author's failure. The book makes strong points about the importance of dealing with losses on financial markets (or other types of activities, say entrepreneurship) and market participant's psychology.
Book itself is divided in 3 parts out of which the first one is the kind of a biography of the author - describing his great successes and later losing of everything he achieved - personally I found the least interesting part of the book, nonetheless it sets the stage for part 2 and 3 which are the essence of the book.
In short I wish I had read this book when I was younger and was starting with investing (or betting as I should rather say, thinking of it from time perspective). I would *strongly* suggest reading this book to anyone who is thinking seriously about dealing with financial markets (or business ventures) to some extent.
Also it's worth to mention - book was published 20 years ago and is definitely still relevant as a whole.
In short - the book is awesome. It's basically the often missing Silent evidence. It's rare to see a book that describes personal author's failure. The book makes strong points about the importance of dealing with losses on financial markets (or other types of activities, say entrepreneurship) and market participant's psychology.
Book itself is divided in 3 parts out of which the first one is the kind of a biography of the author - describing his great successes and later losing of everything he achieved - personally I found the least interesting part of the book, nonetheless it sets the stage for part 2 and 3 which are the essence of the book.
In short I wish I had read this book when I was younger and was starting with investing (or betting as I should rather say, thinking of it from time perspective). I would *strongly* suggest reading this book to anyone who is thinking seriously about dealing with financial markets (or business ventures) to some extent.
Also it's worth to mention - book was published 20 years ago and is definitely still relevant as a whole.
January 14, 2016
Audiobook. It was ok. General lesson in the book: never lose money. Another strong message behind this: don't make losses personal. I like the advice, but the package they are wrapped in in this book does not resonate with me. I didn't like Moynihan's personal stories, the way they were told. Too boring, too uninteresting for me. The "lessons learned" part, in which the author switches from a autobiographical view to a fact view, seems to be a mess of structure to me. For example, I liked the model of investors, traders, speculators, bettors, and gamblers, but when I looked it up again in the book, I have a hard time motivating to connect the different pieces; the information is spread throughout several chapters. Wouldn't recommend it.
March 20, 2019
Surprisingly good because of the author's remarkable candor, colorful storytelling, and a semi-novel focus on how to avoid catastrophic losses in financial markets, rather than focusing, as so many financial books do, on providing a system for winning. While I don't find the conclusions to be comprehensive, and are focused more on people I would call traders than true investors, the findings are still useful and applicable, even with some of the underlying examples being hilariously out-of-date (Paul refers to Steve Jobs as being "lost in the wilderness" at NeXT and pretty much "done for"—that changed a bit after this book). In particular, the recognition of warning signs such as personalizing the markets, is useful—identifying when you're sliding slide into biased positions and trading beyond your own rules—indeed, having rules in the first place, are all worthwhile topics. I wish there were more books like this in the financial canon.
February 15, 2020
I did not like this. The book certainly has some useful lessons: understand and manage emotions when trading, use rules to make investment a series of discrete decisions rather than a continuous process that allows emotionalism in.
What is infuriating, however, is that these lessons could be summed up in a quick article, essay or lecture. Instead Paul drags the reader through 160 pages of repetitive and poorly written tedium.
The first half of the book is an autobiography, presumably intended to demonstrate the hubris in a dramatic fall from fortune. Paul glides through life on a combination of luck, gaming the system and knowing some well placed people, with an overarching obsession with money (perhaps kick-started by his parents pulling him off the baseball team as a child to make him work as a caddy...). By the time he loses his million, it is difficult not to feel a dash of schadenfreude.
He then launches into his lessons learnt. Besides the generally stilted writing style (think a Donald Trump speech) and the bizarre sweeping statements ("the only rewards in the world are recognition and money", "the only human endeavour that both feels good and is good is speculating") I just found this section disorganised and very repetitive. Even just a list of his main points at the beginning would have helped.
The book demonstrates he's neither a trader nor a writer. But perhaps the $30(!!) price tag suggests that he's at least a good salesman.
What is infuriating, however, is that these lessons could be summed up in a quick article, essay or lecture. Instead Paul drags the reader through 160 pages of repetitive and poorly written tedium.
The first half of the book is an autobiography, presumably intended to demonstrate the hubris in a dramatic fall from fortune. Paul glides through life on a combination of luck, gaming the system and knowing some well placed people, with an overarching obsession with money (perhaps kick-started by his parents pulling him off the baseball team as a child to make him work as a caddy...). By the time he loses his million, it is difficult not to feel a dash of schadenfreude.
He then launches into his lessons learnt. Besides the generally stilted writing style (think a Donald Trump speech) and the bizarre sweeping statements ("the only rewards in the world are recognition and money", "the only human endeavour that both feels good and is good is speculating") I just found this section disorganised and very repetitive. Even just a list of his main points at the beginning would have helped.
The book demonstrates he's neither a trader nor a writer. But perhaps the $30(!!) price tag suggests that he's at least a good salesman.
September 15, 2013
Best investment book I've read in the past 5 years. Short and to the point, this book very clearly lays out how investors make fatal mistakes. With blunt honesty Paul shows us how he lost a fortune after a decades long career, and his lessons on risk are unforgettable.
I'll sum up with a quote that sets the tone of this book quite well: "Smart people learn from their mistakes and wise people learn from somebody else's mistakes. Anyone reading this book has a wonderful opportunity to become wise because I am now very, very smart."
Absolutely indispensable book if you have any aspirations toward serious investing or trading in the capital markets.
I'll sum up with a quote that sets the tone of this book quite well: "Smart people learn from their mistakes and wise people learn from somebody else's mistakes. Anyone reading this book has a wonderful opportunity to become wise because I am now very, very smart."
Absolutely indispensable book if you have any aspirations toward serious investing or trading in the capital markets.
December 22, 2020
Interesting book on how loses formed a mans approach towards the market. Can get a little repetitive but the points he repeats make sense to.
Would definitely recommend to anyone interested in financial markets. Doesn’t matter if you like TA or FA both can learn quite a bit from this book.
Would definitely recommend to anyone interested in financial markets. Doesn’t matter if you like TA or FA both can learn quite a bit from this book.
September 12, 2017
Brilliant! This book is so true, it's hilarious and tragic at the same time.
I would not twist the truth if I'd say it is the most useful and close to real life book that I'd ever read on investing.
I would not twist the truth if I'd say it is the most useful and close to real life book that I'd ever read on investing.
October 21, 2018
What did the author learn losing a million dollars in a mere 75 days?
Personalising successes sets people up for disastrous failure
When you have a string of successes even after breaking numerous rules, you begin to think you're special and better than everyone else, but those are just psychological distortion which get built up gradually after each success. Eventually, your boosted ego will set you up for a fall. In Jim Paul's case, he went from a dirt poor country boy to the Board of Governor and Executive Committee member at CME (Chicago Mercantile Exchange) and a millionaire at the age of 33. Naturally, he personalised all the successes he had thus far and that made him hold onto a losing position so long that eventually cost him a 15-year career and 1.6 million loss, all in two-and-a-half months.
There's nothing worse than two people who have on the same position talking to each other about the position.
Considering the following excerpt:
I'd call Smith a couple of times a day to see how the bean oil market was doing.
"How's it look?"
"Oh, it looks great!"
"Yeah, I thought so."
"Yeah, we're fine."
"Yeah, I wish we could buy some more."
Learning how not to lose money is more important than learning how to make money because the pros have made money using very different, and often contradictory, approaches
At first, Jim Paul was confused how come all the market pros are not agreeing with each other. For example,
John Templeton - "Diversify your investments." vs William O'Neil - "Diversification is a hedge for ignorance.".
Jim Rogers - "I haven't met a rich technician." vs Marty Schwartz - "I always laugh at people who say, 'I've never met a rich technician.' I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician."
And then it occured to Jim Paul that the pros could all make money in contradictory ways because they all knew how to control their losses. While one person's method was making money, another person with an opposite approach wouldn't be in the market. He'd be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.
There are as many ways to make money in the markets as there are people in the markets (for example momentum investing, growth investing, value investing), but there are relatively few ways to lose money.
Losing money in the markets is the result of either:
(1) some fault in the analysis, or
(2) some fault in its application.
Since there is no single sure-fire analytical way to make money in the markets as the market pros have demonstrated in 3. , Jim Paul argues that studying the various analytical methods in search of the "best one" is a waste of time. What should be studied are (2), i.e. The psychological factors that prevent people from applying the analysis and cause them to lose money even when they are equipped with accurate analysis, correct forecasts and profitable recommendations.
Market losses are external, objective losses which shouldn't be internalised by equating them with as being wrong
If you take market losses personally, you take what had been a decision about money (external) and make it a matter of reputation and pride (internal). An example of personalising market positions is people's tendency to exit profitable positions and keep unprofitable positions. It's as if profits and losses were a reflection of their intelligence or self-worth; if they take the loss it will make them feel stupid or wrong.
Continuous processes which have no predetermined ending point (e.g., markets) are subject to the Five Stages Of Internal Loss - denial -> anger -> bargaining -> depression -> acceptance.
In the stock market, nothing forces you to acknowledge it as a loss; there's just you, your money and the market as a silent thief. So as long as your money holds out, you can continue to kid yourself that the position is a winner that just hasn't gone your way yet; the position may be losing money, but you tell yourself it's not a loss because you haven't closed the position yet. In the meantime, you will likely to experience Five Stages of Internal Loss multiple times as you can loop back to denial after each and every temporary reprieve the market gives you.
5 Activities Dealing with Uncertainties
Investing: Parting with capital in the expectation of safety of principal and an adequate return on the capital in the form of dividends, interest or rent.
Trading: Trying to stay net flat (neither long nor short) and making money by extracting the bid-ask spread.
Speculating: Parting with capital in the expectation of capital appreciation. No period dividends or interest payments are anticipated.
Betting: Trying to be right or wrong. There are two kinds of reward in the world: recognition and money. Are you in the market for recognition, congratulating yourself for calling every market move ahead of time and explaining the move after the fact, or are you in the market to make money? To answer, you have to examine the characteristics and behaviours you are exhibiting, not the activity.
Gambling: Wagering money on the outcome of events purely for entertainment.
Behavioural Characteristics Determine the Activity: Don't make the mistake of assuming that just because you're participating in the market, then you are automatically investing, trading or speculating
Determining which activities you are doing is a function of the behavioural characteristics you exhibit and how you approaches the activity.
Consider Edward O. Thorp, the author of Beat The Dealer and a mathematics professor who devised a winning card counting system on a high-speed computer. He wasn't gambling, even though he was playing cards.
On the other hand, you can find bettors and gamblers in the markets if they are exhibiting the characteristics of a bettor or gambler? Even though they may think they are investing.
Money Odds vs. Probability Odds
Many market participants express the probability of success in terms of a risk/reward ratio. For example, if they bought a stock at $26 and placed a sell stop at $23 with an upside objective of $36. They think their risk/reward ratio would be 3:10. Risk $3 to make $10. The 3:10 ratio has nothing to do with the probability that the stock can or will get to $36. All the ratio does is compare the dollar amount of what they think they might lose to the dollar amount of what they think they might make. But it doesn't say anything about the probability of either event occurring.
We don't need models to warn us of impending manias or panics in a market. Rather, we need a model to alert us to when we are becoming part of a crowd.
So, instead of trying to monitor yourself for all the different emotions and what they might mean, simply monitor yourself for the few stages of crowd formation. By avoiding the tell-tale symptoms which accompany becoming part of the crowd, you will automatically avoid emotionalism.
What is a Crowd?
When the sentiments and ideas of all the people in the gathering take one and the same direction and their conscious individual personality disappears, then the gathering has become a psychological crowd.
Individual acts after reasoning, deliberation and analysis; a crowd acts on feeling, emotion and impulses. An individual will think out his opinions, whereas a crowd is swayed by emotional viewpoints rather than by reasoning. In the crowd, emotional and thoughtless opinions spread widely via imitation and contagion.
So whenever you find yourself induced to committing acts contrary to your most obvious interest, such as not executing your original intended cut loss point, that may be a sign you are a member of the psychological crowding and committing crowd trade.
Hope/Fear Paradox. Hope and fear are not isolated emotions, they are merely two sides of the same coin. More often than not you are likely to experience both hope and fear simultaneously. The point is: focusing on individual emotions can be quite confusing and it is better to focus on emotionalism instead.
The leitmotiv of the book
People lose (really lose, not just have occasional losing trades) because of psychological factors, not analytical ones (Chapter Five). They personalize the market and their positions (Chapters One through Four), internalizing what should be external losses (Chapter Six), confusing the different types of risk activities (Chapter Seven) and making crowd trades (Chapter Eight). Is there a single, factor common to all of these errors, and can we determine a way to address that factor in order to avoid the errors?
Yes, the common factor which triggers the mental processes, behavioural characteristics and emotions of a net loser: the uncertainty of the future.
The way to address uncertainty of the future is to have a sound decision-making process
Broadly speaking, the decision-making process is as follows:
1) Decide what type of participant you're going to be,
2) Select a method of analysis,
3) Develop rules,
4) Establish controls,
5) Formulate a plan.
Depending on what your goals or objectives are on the continuum of conservative to aggressive, you will decide whether you are an investor or speculator, which in turn will help you decide what markets to participate in, what method of analysis you'll use, what rules you'll develop, what controls you'll have, and how you will implement these things with a plan.
1) Decide what type of participant you're going to be
The first thing you decide is what type of participant you are going to be (investor or speculator). Then you select what market you are going to participate in (stocks, bonds, currencies, futures). The plan you develop must be consistent with the characteristics and time horizon of the type of participant you choose to be. Why? Changing your initial time horizon in the middle of a trade changes the type of participant you are, and is almost as dangerous as betting or gambling in the market. For example, what's an investment to most people who dabble in the stock market? Ninety percent of the time an "investment" is a "trade" that didn't work. People start with the idea of making money in a relatively short period of time, but when they start losing money they lengthen their time frame horizon and suddenly the trade becomes an investment.
Anytime someone says he can't get out because he's losing too much, he has personalized the market; he just doesn't want to lose face by realizing the loss. The stock player can stay in the position forever, which is why it's especially important to decide what type of participant you're going to be when you're in the stock market.
2) Select a method of analysis
Next, you must select a method of market analysis that you are going to use. Otherwise, you will jump back and forth among several methods in search of supporting evidence to justify holding onto a market position. Because there are so many ways to analyze the market, you will inevitably find some indicator from some method of analysis that can be used to justify holding a position. This is true for both profitable and unprofitable positions: you will keep a profitable position longer than originally intended and possibly have it turn into a loss, and you will rationalize holding a losing position far beyond what you were originally willing to lose.
Your analysis is the set of tools you will use to describe market conditions. Fundamental analysis in the stock market doesn't tell you when to enter the market. A certain level of expected earnings combined with its P/E ratio, price to book value ratio and other fundamental variables doesn't specifically instruct you on when to make actual purchases and sales. The different methods of technical analysis don't always offer specific instructions on when to make purchases or sales either. They are means of describing the conditions of the market. Analysis is simply that: analysis. It doesn't tell you what to do, or when to do it.
3) Develop rules
In order to translate your analysis into something more than mere commentary, you need to define what constitutes an opportunity for you. That's what rules do; they implement your analysis. Rules are hard-and-fast. Tools (i.e., methods of analysis) have some flexibility in how they are used. How? By doing homework (i.e., research, testing, trial-and-error), and defining the parameters with rules. Your homework determines what parameters or conditions define an opportunity, and your rules are the "if ... , then ..." statements which implement your analysis. This means entry and exit points are derived after you have done your analysis.
If the opportunity-defining criteria aren't met, you don't act. This doesn't mean a particular trade or investment which you pass up won't turn out to be profitable.
4) Establish controls
The next step in decision-making is establishing controls; i.e., the exit criteria which will take you out of the market either at a profit or loss. They take the form of a price order, a time stop or a condition stop (i.e., if a certain thing happens or fails to happen then you are getting out of the market). Your exit criteria create a discrete event, ending the position and preventing the continuous process from going on and on.
Controls should be consistent with the strategy, not that they should be selected after the strategy is implemented. Unfortunately, most market participants pick their stop after they decide to enter the market and some never put in a stop at all. You must pick the loss side first. Why? Otherwise, after you enter the market everything you look at and hear will be skewed in favor of your position.
Formulate a plan.
The plan must be derived by deciding: STOP, ENTRY then PRICE OBJECTIVE. Failure to choose a price objective could cost the trader some potential profits. A poor entry price could increase losses or reduce profits. But not having a predetermined stop-loss can, and ultimately will, cost you a lot of money.
In contrast to what most people do, your entry point should be a function of the exit point. Once you specify what price or under what circumstances you would no longer want the position, and specify how much money you are willing to lose, then, and only then, can you start thinking about where to enter the market. Citing Drucker, "The first step in planning is to ask of any activity, any product, any process or market, 'If we were not committed to it today, would we go into it?' If the answer is no, one says, 'How can we get out -- fast?"'
If you wait until after the position is established to choose your exit point or begin moving the stop to allow more room for losses, or alter the fundamental factors you monitor in your decision-making, then you: 1) internalize the loss because you don't want to lose face, 2) bet or gamble on the position because you want to be right and 3) make crowd trades because you're making emotional decisions. As a result, you will lose considerably more money than you can afford.
Your plan is a script of what you expect to happen based on your particular method of analysis and provides a clear course of action if it doesn't happen; you have prepared for different scenarios and know how you will react to each of them. This doesn't mean you're predicting the future. It means you know ahead of time what alternative courses of action you will take if event A, B or C happens.
Why having a plan is important?
a) A plan, which determines the stop-loss first, enables you to convert a naturally dangerous, continuous process into a finite, discrete event and prevent losses due to psychological factors.
The uncertainty of the future when facing a market loss triggers the Five Stages of Internal Loss. Setting the loss to a predetermined amount short circuit the Five Stages by going straight to the acceptance stage. Knowing the amount of loss ahead of time reduces the uncertainty factor to nil, because you've acknowledged and accepted the amount of the potential loss before it occurs. Otherwise, neither profit nor loss is locked, you're leaving yourself open to being pushed and pulled around by fluctuating prices, random news events and other people's opinions.
Having a plan requires thinking, which only an individual can do -- not a crowd.
Following your plan imposes discipline over your emotions. Since discipline means not doing what your emotions would have you do, then if you don't have the discipline to follow the plan, your emotions have taken control and you wind up in the crowd.
What happens when you do not have and follow a plan?
1. Do you have a plan?
Yes, go to 2.
No, go to 3.
2. Do you have the discipline to follow the plan?
Yes, go to 4.
No, go to 5.
3. Then you haven't thought things out ahead of time and, by default you are gambling or betting-both of which involve your ego, which means you have personalized the market. Without the conscious mental effort of developing a plan, your unconscious (i.e., emotions) is in control. With your emotions in control you are part of a psychological crowd, making emotional decisions.
4. Then you will be as successful as your method of analysis permits.
5. Since discipline means forcing yourself NOT to do what your emotions would have you do, then without that discipline your emotions are in control and so go back to 3.
{{{Anything that strays away from 1->2->4 means you will succumb to emotional decisions}}}
b) A Plan ensures Objectivity
For the market participant, the last moment of objectivity is the moment before he enters the market, after which he can still do plenty to lose more money. This is why you must determine your exit and entry criteria during the pre-trade, objective time period when your thinking is clear.
Thought-based decisions are deductive, while emotion-based are inductive. Inductive puts acting before thinking; establishing a market position and then doing the work, selectively emphasizing the supporting evidence and ignoring the non-supporting evidence. Deductive thinking, on the other hand, is consistent with the "thinking before acting" sequence of a plan: doing all of your homework/analysis and then, by default, arriving at a conclusion of whether, what and when to buy and sell.
Another way of looking at it is: are you long because you're bullish or bullish because you're long? If you're bullish because you're long, your decision was inductive and you will look for reasons, other people's opinions or anything to keep you in your position-- anything to keep you from looking stupid or admitting you are wrong. Invariably, you find what you are looking for to justify staying in a losing position and the losses will mount.
{{{Talk openly about a stock or even stock market in general is bad when you haven’t researched enough, because once you express an opinion, you have to keep supporting it, i.e. Consistency Syndrome. The better approach is to have a solid thesis, e.g. how did you derive to such conclusion, what analysis did you use? under what situation you will do what? under what situation you will not do what? This way you are introducing an objective plan, not subjective opinion}}}
c. Commit the Plan to Paper
To prevent unintentional and implicit violation of your plan, no device is more effective than setting down that plan before your eyes explicitly in black and white. This objectifies, externalizes and depersonalizes your thinking, so you can hold yourself accountable.
Personalising successes sets people up for disastrous failure
When you have a string of successes even after breaking numerous rules, you begin to think you're special and better than everyone else, but those are just psychological distortion which get built up gradually after each success. Eventually, your boosted ego will set you up for a fall. In Jim Paul's case, he went from a dirt poor country boy to the Board of Governor and Executive Committee member at CME (Chicago Mercantile Exchange) and a millionaire at the age of 33. Naturally, he personalised all the successes he had thus far and that made him hold onto a losing position so long that eventually cost him a 15-year career and 1.6 million loss, all in two-and-a-half months.
There's nothing worse than two people who have on the same position talking to each other about the position.
Considering the following excerpt:
I'd call Smith a couple of times a day to see how the bean oil market was doing.
"How's it look?"
"Oh, it looks great!"
"Yeah, I thought so."
"Yeah, we're fine."
"Yeah, I wish we could buy some more."
Learning how not to lose money is more important than learning how to make money because the pros have made money using very different, and often contradictory, approaches
At first, Jim Paul was confused how come all the market pros are not agreeing with each other. For example,
John Templeton - "Diversify your investments." vs William O'Neil - "Diversification is a hedge for ignorance.".
Jim Rogers - "I haven't met a rich technician." vs Marty Schwartz - "I always laugh at people who say, 'I've never met a rich technician.' I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician."
And then it occured to Jim Paul that the pros could all make money in contradictory ways because they all knew how to control their losses. While one person's method was making money, another person with an opposite approach wouldn't be in the market. He'd be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.
There are as many ways to make money in the markets as there are people in the markets (for example momentum investing, growth investing, value investing), but there are relatively few ways to lose money.
Losing money in the markets is the result of either:
(1) some fault in the analysis, or
(2) some fault in its application.
Since there is no single sure-fire analytical way to make money in the markets as the market pros have demonstrated in 3. , Jim Paul argues that studying the various analytical methods in search of the "best one" is a waste of time. What should be studied are (2), i.e. The psychological factors that prevent people from applying the analysis and cause them to lose money even when they are equipped with accurate analysis, correct forecasts and profitable recommendations.
Market losses are external, objective losses which shouldn't be internalised by equating them with as being wrong
If you take market losses personally, you take what had been a decision about money (external) and make it a matter of reputation and pride (internal). An example of personalising market positions is people's tendency to exit profitable positions and keep unprofitable positions. It's as if profits and losses were a reflection of their intelligence or self-worth; if they take the loss it will make them feel stupid or wrong.
Continuous processes which have no predetermined ending point (e.g., markets) are subject to the Five Stages Of Internal Loss - denial -> anger -> bargaining -> depression -> acceptance.
In the stock market, nothing forces you to acknowledge it as a loss; there's just you, your money and the market as a silent thief. So as long as your money holds out, you can continue to kid yourself that the position is a winner that just hasn't gone your way yet; the position may be losing money, but you tell yourself it's not a loss because you haven't closed the position yet. In the meantime, you will likely to experience Five Stages of Internal Loss multiple times as you can loop back to denial after each and every temporary reprieve the market gives you.
5 Activities Dealing with Uncertainties
Investing: Parting with capital in the expectation of safety of principal and an adequate return on the capital in the form of dividends, interest or rent.
Trading: Trying to stay net flat (neither long nor short) and making money by extracting the bid-ask spread.
Speculating: Parting with capital in the expectation of capital appreciation. No period dividends or interest payments are anticipated.
Betting: Trying to be right or wrong. There are two kinds of reward in the world: recognition and money. Are you in the market for recognition, congratulating yourself for calling every market move ahead of time and explaining the move after the fact, or are you in the market to make money? To answer, you have to examine the characteristics and behaviours you are exhibiting, not the activity.
Gambling: Wagering money on the outcome of events purely for entertainment.
Behavioural Characteristics Determine the Activity: Don't make the mistake of assuming that just because you're participating in the market, then you are automatically investing, trading or speculating
Determining which activities you are doing is a function of the behavioural characteristics you exhibit and how you approaches the activity.
Consider Edward O. Thorp, the author of Beat The Dealer and a mathematics professor who devised a winning card counting system on a high-speed computer. He wasn't gambling, even though he was playing cards.
On the other hand, you can find bettors and gamblers in the markets if they are exhibiting the characteristics of a bettor or gambler? Even though they may think they are investing.
Money Odds vs. Probability Odds
Many market participants express the probability of success in terms of a risk/reward ratio. For example, if they bought a stock at $26 and placed a sell stop at $23 with an upside objective of $36. They think their risk/reward ratio would be 3:10. Risk $3 to make $10. The 3:10 ratio has nothing to do with the probability that the stock can or will get to $36. All the ratio does is compare the dollar amount of what they think they might lose to the dollar amount of what they think they might make. But it doesn't say anything about the probability of either event occurring.
We don't need models to warn us of impending manias or panics in a market. Rather, we need a model to alert us to when we are becoming part of a crowd.
So, instead of trying to monitor yourself for all the different emotions and what they might mean, simply monitor yourself for the few stages of crowd formation. By avoiding the tell-tale symptoms which accompany becoming part of the crowd, you will automatically avoid emotionalism.
What is a Crowd?
When the sentiments and ideas of all the people in the gathering take one and the same direction and their conscious individual personality disappears, then the gathering has become a psychological crowd.
Individual acts after reasoning, deliberation and analysis; a crowd acts on feeling, emotion and impulses. An individual will think out his opinions, whereas a crowd is swayed by emotional viewpoints rather than by reasoning. In the crowd, emotional and thoughtless opinions spread widely via imitation and contagion.
So whenever you find yourself induced to committing acts contrary to your most obvious interest, such as not executing your original intended cut loss point, that may be a sign you are a member of the psychological crowding and committing crowd trade.
Hope/Fear Paradox. Hope and fear are not isolated emotions, they are merely two sides of the same coin. More often than not you are likely to experience both hope and fear simultaneously. The point is: focusing on individual emotions can be quite confusing and it is better to focus on emotionalism instead.
The leitmotiv of the book
People lose (really lose, not just have occasional losing trades) because of psychological factors, not analytical ones (Chapter Five). They personalize the market and their positions (Chapters One through Four), internalizing what should be external losses (Chapter Six), confusing the different types of risk activities (Chapter Seven) and making crowd trades (Chapter Eight). Is there a single, factor common to all of these errors, and can we determine a way to address that factor in order to avoid the errors?
Yes, the common factor which triggers the mental processes, behavioural characteristics and emotions of a net loser: the uncertainty of the future.
The way to address uncertainty of the future is to have a sound decision-making process
Broadly speaking, the decision-making process is as follows:
1) Decide what type of participant you're going to be,
2) Select a method of analysis,
3) Develop rules,
4) Establish controls,
5) Formulate a plan.
Depending on what your goals or objectives are on the continuum of conservative to aggressive, you will decide whether you are an investor or speculator, which in turn will help you decide what markets to participate in, what method of analysis you'll use, what rules you'll develop, what controls you'll have, and how you will implement these things with a plan.
1) Decide what type of participant you're going to be
The first thing you decide is what type of participant you are going to be (investor or speculator). Then you select what market you are going to participate in (stocks, bonds, currencies, futures). The plan you develop must be consistent with the characteristics and time horizon of the type of participant you choose to be. Why? Changing your initial time horizon in the middle of a trade changes the type of participant you are, and is almost as dangerous as betting or gambling in the market. For example, what's an investment to most people who dabble in the stock market? Ninety percent of the time an "investment" is a "trade" that didn't work. People start with the idea of making money in a relatively short period of time, but when they start losing money they lengthen their time frame horizon and suddenly the trade becomes an investment.
Anytime someone says he can't get out because he's losing too much, he has personalized the market; he just doesn't want to lose face by realizing the loss. The stock player can stay in the position forever, which is why it's especially important to decide what type of participant you're going to be when you're in the stock market.
2) Select a method of analysis
Next, you must select a method of market analysis that you are going to use. Otherwise, you will jump back and forth among several methods in search of supporting evidence to justify holding onto a market position. Because there are so many ways to analyze the market, you will inevitably find some indicator from some method of analysis that can be used to justify holding a position. This is true for both profitable and unprofitable positions: you will keep a profitable position longer than originally intended and possibly have it turn into a loss, and you will rationalize holding a losing position far beyond what you were originally willing to lose.
Your analysis is the set of tools you will use to describe market conditions. Fundamental analysis in the stock market doesn't tell you when to enter the market. A certain level of expected earnings combined with its P/E ratio, price to book value ratio and other fundamental variables doesn't specifically instruct you on when to make actual purchases and sales. The different methods of technical analysis don't always offer specific instructions on when to make purchases or sales either. They are means of describing the conditions of the market. Analysis is simply that: analysis. It doesn't tell you what to do, or when to do it.
3) Develop rules
In order to translate your analysis into something more than mere commentary, you need to define what constitutes an opportunity for you. That's what rules do; they implement your analysis. Rules are hard-and-fast. Tools (i.e., methods of analysis) have some flexibility in how they are used. How? By doing homework (i.e., research, testing, trial-and-error), and defining the parameters with rules. Your homework determines what parameters or conditions define an opportunity, and your rules are the "if ... , then ..." statements which implement your analysis. This means entry and exit points are derived after you have done your analysis.
If the opportunity-defining criteria aren't met, you don't act. This doesn't mean a particular trade or investment which you pass up won't turn out to be profitable.
4) Establish controls
The next step in decision-making is establishing controls; i.e., the exit criteria which will take you out of the market either at a profit or loss. They take the form of a price order, a time stop or a condition stop (i.e., if a certain thing happens or fails to happen then you are getting out of the market). Your exit criteria create a discrete event, ending the position and preventing the continuous process from going on and on.
Controls should be consistent with the strategy, not that they should be selected after the strategy is implemented. Unfortunately, most market participants pick their stop after they decide to enter the market and some never put in a stop at all. You must pick the loss side first. Why? Otherwise, after you enter the market everything you look at and hear will be skewed in favor of your position.
Formulate a plan.
The plan must be derived by deciding: STOP, ENTRY then PRICE OBJECTIVE. Failure to choose a price objective could cost the trader some potential profits. A poor entry price could increase losses or reduce profits. But not having a predetermined stop-loss can, and ultimately will, cost you a lot of money.
In contrast to what most people do, your entry point should be a function of the exit point. Once you specify what price or under what circumstances you would no longer want the position, and specify how much money you are willing to lose, then, and only then, can you start thinking about where to enter the market. Citing Drucker, "The first step in planning is to ask of any activity, any product, any process or market, 'If we were not committed to it today, would we go into it?' If the answer is no, one says, 'How can we get out -- fast?"'
If you wait until after the position is established to choose your exit point or begin moving the stop to allow more room for losses, or alter the fundamental factors you monitor in your decision-making, then you: 1) internalize the loss because you don't want to lose face, 2) bet or gamble on the position because you want to be right and 3) make crowd trades because you're making emotional decisions. As a result, you will lose considerably more money than you can afford.
Your plan is a script of what you expect to happen based on your particular method of analysis and provides a clear course of action if it doesn't happen; you have prepared for different scenarios and know how you will react to each of them. This doesn't mean you're predicting the future. It means you know ahead of time what alternative courses of action you will take if event A, B or C happens.
Why having a plan is important?
a) A plan, which determines the stop-loss first, enables you to convert a naturally dangerous, continuous process into a finite, discrete event and prevent losses due to psychological factors.
The uncertainty of the future when facing a market loss triggers the Five Stages of Internal Loss. Setting the loss to a predetermined amount short circuit the Five Stages by going straight to the acceptance stage. Knowing the amount of loss ahead of time reduces the uncertainty factor to nil, because you've acknowledged and accepted the amount of the potential loss before it occurs. Otherwise, neither profit nor loss is locked, you're leaving yourself open to being pushed and pulled around by fluctuating prices, random news events and other people's opinions.
Having a plan requires thinking, which only an individual can do -- not a crowd.
Following your plan imposes discipline over your emotions. Since discipline means not doing what your emotions would have you do, then if you don't have the discipline to follow the plan, your emotions have taken control and you wind up in the crowd.
What happens when you do not have and follow a plan?
1. Do you have a plan?
Yes, go to 2.
No, go to 3.
2. Do you have the discipline to follow the plan?
Yes, go to 4.
No, go to 5.
3. Then you haven't thought things out ahead of time and, by default you are gambling or betting-both of which involve your ego, which means you have personalized the market. Without the conscious mental effort of developing a plan, your unconscious (i.e., emotions) is in control. With your emotions in control you are part of a psychological crowd, making emotional decisions.
4. Then you will be as successful as your method of analysis permits.
5. Since discipline means forcing yourself NOT to do what your emotions would have you do, then without that discipline your emotions are in control and so go back to 3.
{{{Anything that strays away from 1->2->4 means you will succumb to emotional decisions}}}
b) A Plan ensures Objectivity
For the market participant, the last moment of objectivity is the moment before he enters the market, after which he can still do plenty to lose more money. This is why you must determine your exit and entry criteria during the pre-trade, objective time period when your thinking is clear.
Thought-based decisions are deductive, while emotion-based are inductive. Inductive puts acting before thinking; establishing a market position and then doing the work, selectively emphasizing the supporting evidence and ignoring the non-supporting evidence. Deductive thinking, on the other hand, is consistent with the "thinking before acting" sequence of a plan: doing all of your homework/analysis and then, by default, arriving at a conclusion of whether, what and when to buy and sell.
Another way of looking at it is: are you long because you're bullish or bullish because you're long? If you're bullish because you're long, your decision was inductive and you will look for reasons, other people's opinions or anything to keep you in your position-- anything to keep you from looking stupid or admitting you are wrong. Invariably, you find what you are looking for to justify staying in a losing position and the losses will mount.
{{{Talk openly about a stock or even stock market in general is bad when you haven’t researched enough, because once you express an opinion, you have to keep supporting it, i.e. Consistency Syndrome. The better approach is to have a solid thesis, e.g. how did you derive to such conclusion, what analysis did you use? under what situation you will do what? under what situation you will not do what? This way you are introducing an objective plan, not subjective opinion}}}
c. Commit the Plan to Paper
To prevent unintentional and implicit violation of your plan, no device is more effective than setting down that plan before your eyes explicitly in black and white. This objectifies, externalizes and depersonalizes your thinking, so you can hold yourself accountable.
This entire review has been hidden because of spoilers.
August 12, 2015
($1.5 million, actually)
If you've read Nassim Taleb's Fooled by Randomness (or others), then you've heard the stories of young traders who weren't even alive during previous market crashes who make soaring fortunes, convince themselves of their own greatness, live the high life, then come crashing down when suddenly the market turns and they're left broke and unemployed after realizing markets don't always go up. Most of those traders don't write books, but fortunately Jim Paul did (and he's older than my dad).
This book was on Tim Ferriss' recommended list and I've heard several people cite what it taught them, and given that Paul was a Kentuckian I was interested to read the tale. It's a quick read and mostly interesting. If you've already read quite a bit of Taleb, Kahneman, Arielly, or other behavioral economists then you might not glean much insight into human behavior. But the vast majority of people I've met in the finance industry have not read those authors and suffer from the same hubris.
The book is summed up in the beginning, but here's the book in a paragraph:
It is a study of losing in order to win; success too often sets the stage for failure. The key lesson is not to personalize success or failure. Every business book written by traders with recipes for success contains contradictions. Following one "successful" strategy will put you at odds with someone else's "successful" strategy. Just because a person appears successful (or not) does not mean that he is, he was most likely lucky (even if convinced otherwise). People don't write books about the unlucky. One way to get an edge in life is to study the rules and use them to your advantage. If you're a trader, use a hard rule to cut your losses and walk away. First, decide what kind of market you are going to participate in, then decide what kind of market analysis you are going to use, and then what your maximum acceptable loss is. Be disciplined not to deviate from your rules. If someone asks you "are you in, or will you stay stupid?" simply explain that person's trade may be successful but it's not part of your own strategy. Understand that losses are objective, they will happen, and they're not your fault. But not minimizing those losses by walking away "when it becomes painful" is your fault, and that's what Paul stresses.
Paul grew up in Elsmere, KY not far from Cincinnati. Even as a nine year old in the 1950s he had to work to pay for his Catholic school tuition and books. He enrolled at the University of Kentucky in 1961 and essentially invited himself into a fraternity, then hustled someone at cards to avoid hazing. He was not a model student but did well enough in business and economics because he understood it intuitively, although he was horrible at math. He grew up working at a country club and it seems his dad knew some people, eventually he joints the Army and gets into OCS via a Congressman's phone call. At OCS he finally buckles down to obey the rules and give his best effort, graduating at the top of his class. He gets to miss Vietnam, which is a bonus.
He gets an MBA from Xavier which helps him broaden his network. He struggled with the math-intensive courses in the MBA program, and gives encouragement to anyone with a weakness: learn from the division of labor. "If you can't do something pay someone who can and don't worry about it." He gets on with a firm that offers him a job trading and learning from other more powerful brokers, basically by reading the book related to their psychological evaluation so he knows how to get a perfect score. (Find the rules and use them.) By 1969, he keeps getting the idea that he is "better" than everyone due to his ability to climb. He turns down a low offer with a big NYC trader and ends up doing better in Cincinnati.
When fired, he moves to Cleveland and a small firm entering the commodity markets, booming after Nixon closes the "gold window" in 1971. He sets up shop on the Chicago Board of Trade using "LUCK" as his name tag in order to get noticed and remembered. He quickly gets elected to be part of the Board of Governors, making him privy to the inner circle that runs the exchange, easily making $200-300 annually. But he admits that the "vast majority" of his wins were "lucky," he had no idea why he was making money. When the market for timber tanks, he is fired and is taken off the Chicago Board. This leads to a time of depression and a near suicide attempt. It's here he decides to learn rather than change careers.
He studies books by all the legendary traders and self-made millionaires, finding most of their trading strategies contradictory and therefore unhelpful. He then begins to pay attention to what they say about losses, and realizes it's better to control your losses than worry about wins. Paul's mom sadly commits suicide over his dad's debilitating illness before learning of the loss of his Chicago job, but that event also helps put loss and depression in perspective.
He learns not to internalize external losses. Market losses are objective and only God knows what markets will do. But Paul was taking everything personally, including losses with his client's money, that they put up knowing there was risk. Markets don't always go up, just like Kentucky doesn't win every basketball game. Betting on Kentucky to win and taking it personally when they lost was dumb. He reads On Death and Dying and describes the five stages of grief as similar to what irrational traders feel. He basically discovers the myth of the hot-hand and the false runs that fool traders and Vegas gamblers.
Paul notes the crowd/herd mentality. While the Buffetts of the world may claim to make money by moving against the crowd, this is not always the case. More often, if everyone else is headed for the exits that's a sign you should too. When it becomes "painful," get out. The crowd removes inhibition, people do more and risk more when in a crowd due to its anonymity.
Decide what kind of market participant you are going to be, what kind of market analysis you are going to use, and what your stop-loss rule will be before you enter any market. Peter Drucker reminds us that "There is no perfect decision." People who ask why the market is up or down usually want to justify their own trading positions, they're either arguing with the market as to its wisdom or figuring out when the timing will work in their favor-- both are silly. LBJ did not have an exit strategy or stop-loss limit in Vietnam, like a trader who just throws bad money after good down the rabbit hole. When someone asks you what the market is going to do answer according to the method that you use to invest, or your model, not according to your subjective opinion (working in an economic forecasting office, I agree). Write your plan down and stick with it. When you feel pain, stop.
Ultimately, your life's value is not determined by what you have accomplished but how you have accomplished, your self-worth should not be a reflection of events outside of your control.
The audio version ends with Paul being interviewed by Tim Ferriss, and their discussing Nassim Taleb's praise for this book.
I enjoyed it, I give it 4 stars out of 5. I recommend it to anyone involved in finance or managers who struggle with personalizing success/losses in their projects.
If you've read Nassim Taleb's Fooled by Randomness (or others), then you've heard the stories of young traders who weren't even alive during previous market crashes who make soaring fortunes, convince themselves of their own greatness, live the high life, then come crashing down when suddenly the market turns and they're left broke and unemployed after realizing markets don't always go up. Most of those traders don't write books, but fortunately Jim Paul did (and he's older than my dad).
This book was on Tim Ferriss' recommended list and I've heard several people cite what it taught them, and given that Paul was a Kentuckian I was interested to read the tale. It's a quick read and mostly interesting. If you've already read quite a bit of Taleb, Kahneman, Arielly, or other behavioral economists then you might not glean much insight into human behavior. But the vast majority of people I've met in the finance industry have not read those authors and suffer from the same hubris.
The book is summed up in the beginning, but here's the book in a paragraph:
It is a study of losing in order to win; success too often sets the stage for failure. The key lesson is not to personalize success or failure. Every business book written by traders with recipes for success contains contradictions. Following one "successful" strategy will put you at odds with someone else's "successful" strategy. Just because a person appears successful (or not) does not mean that he is, he was most likely lucky (even if convinced otherwise). People don't write books about the unlucky. One way to get an edge in life is to study the rules and use them to your advantage. If you're a trader, use a hard rule to cut your losses and walk away. First, decide what kind of market you are going to participate in, then decide what kind of market analysis you are going to use, and then what your maximum acceptable loss is. Be disciplined not to deviate from your rules. If someone asks you "are you in, or will you stay stupid?" simply explain that person's trade may be successful but it's not part of your own strategy. Understand that losses are objective, they will happen, and they're not your fault. But not minimizing those losses by walking away "when it becomes painful" is your fault, and that's what Paul stresses.
Paul grew up in Elsmere, KY not far from Cincinnati. Even as a nine year old in the 1950s he had to work to pay for his Catholic school tuition and books. He enrolled at the University of Kentucky in 1961 and essentially invited himself into a fraternity, then hustled someone at cards to avoid hazing. He was not a model student but did well enough in business and economics because he understood it intuitively, although he was horrible at math. He grew up working at a country club and it seems his dad knew some people, eventually he joints the Army and gets into OCS via a Congressman's phone call. At OCS he finally buckles down to obey the rules and give his best effort, graduating at the top of his class. He gets to miss Vietnam, which is a bonus.
He gets an MBA from Xavier which helps him broaden his network. He struggled with the math-intensive courses in the MBA program, and gives encouragement to anyone with a weakness: learn from the division of labor. "If you can't do something pay someone who can and don't worry about it." He gets on with a firm that offers him a job trading and learning from other more powerful brokers, basically by reading the book related to their psychological evaluation so he knows how to get a perfect score. (Find the rules and use them.) By 1969, he keeps getting the idea that he is "better" than everyone due to his ability to climb. He turns down a low offer with a big NYC trader and ends up doing better in Cincinnati.
When fired, he moves to Cleveland and a small firm entering the commodity markets, booming after Nixon closes the "gold window" in 1971. He sets up shop on the Chicago Board of Trade using "LUCK" as his name tag in order to get noticed and remembered. He quickly gets elected to be part of the Board of Governors, making him privy to the inner circle that runs the exchange, easily making $200-300 annually. But he admits that the "vast majority" of his wins were "lucky," he had no idea why he was making money. When the market for timber tanks, he is fired and is taken off the Chicago Board. This leads to a time of depression and a near suicide attempt. It's here he decides to learn rather than change careers.
He studies books by all the legendary traders and self-made millionaires, finding most of their trading strategies contradictory and therefore unhelpful. He then begins to pay attention to what they say about losses, and realizes it's better to control your losses than worry about wins. Paul's mom sadly commits suicide over his dad's debilitating illness before learning of the loss of his Chicago job, but that event also helps put loss and depression in perspective.
He learns not to internalize external losses. Market losses are objective and only God knows what markets will do. But Paul was taking everything personally, including losses with his client's money, that they put up knowing there was risk. Markets don't always go up, just like Kentucky doesn't win every basketball game. Betting on Kentucky to win and taking it personally when they lost was dumb. He reads On Death and Dying and describes the five stages of grief as similar to what irrational traders feel. He basically discovers the myth of the hot-hand and the false runs that fool traders and Vegas gamblers.
Paul notes the crowd/herd mentality. While the Buffetts of the world may claim to make money by moving against the crowd, this is not always the case. More often, if everyone else is headed for the exits that's a sign you should too. When it becomes "painful," get out. The crowd removes inhibition, people do more and risk more when in a crowd due to its anonymity.
Decide what kind of market participant you are going to be, what kind of market analysis you are going to use, and what your stop-loss rule will be before you enter any market. Peter Drucker reminds us that "There is no perfect decision." People who ask why the market is up or down usually want to justify their own trading positions, they're either arguing with the market as to its wisdom or figuring out when the timing will work in their favor-- both are silly. LBJ did not have an exit strategy or stop-loss limit in Vietnam, like a trader who just throws bad money after good down the rabbit hole. When someone asks you what the market is going to do answer according to the method that you use to invest, or your model, not according to your subjective opinion (working in an economic forecasting office, I agree). Write your plan down and stick with it. When you feel pain, stop.
Ultimately, your life's value is not determined by what you have accomplished but how you have accomplished, your self-worth should not be a reflection of events outside of your control.
The audio version ends with Paul being interviewed by Tim Ferriss, and their discussing Nassim Taleb's praise for this book.
I enjoyed it, I give it 4 stars out of 5. I recommend it to anyone involved in finance or managers who struggle with personalizing success/losses in their projects.
March 15, 2019
I heard about this book in Nassim Nicholas Taleb's Antifragile. Taleb, never one to mince words or disparage an entire profession (economists), described the book as "one of the new non-charlatanic personal finance books".
This book is an investing parable; a short story of one man's investing hubris, losing it all, and what he learned. Jim Paul always thought he was smart, and thought he was invincible. Turns out he was both lucky, and so emotionally attached to his investments he couldn't bring himself to sell - his colleagues eventually forcibly closed his positions.
Paul followed up his loss by studying how the pros MAKE money. What he found was what we all find if we read personal finance or investing books: a million different contradictory ways to do it. He refocused and studied how people LOSE money, and found there are only a few ways: people personalize the market and their investments, internalize what should be external losses (they take losses personally), confuse different types of risk, and trade with the crowd.
How can you avoid all this? Easy: have a plan and stick to it.
This was a great book for me to read right now. Most of my personal plan aligns with the low-maintenance index fund strategies from Millionaire Teacher (fantastic book - similar to Canadian Couch Potato), but I've dabbled with mixed success in a few stocks. I realize now that I have not been fully planning these purchases (all you need is entry point, price objective, and stop limit to limit losses). Sticking to an investment plan is a way to depersonalize losses. You'll win some and lose some, but sticking to a plan ensures you don't go down with a sinking ship. Planning makes the difference between investing/speculating, and gambling/betting.
Hard to find in Saskatoon - doesn't exist in the public library system. Robyn borrowed a copy from SIAST in PA via the U of S library.
This book is an investing parable; a short story of one man's investing hubris, losing it all, and what he learned. Jim Paul always thought he was smart, and thought he was invincible. Turns out he was both lucky, and so emotionally attached to his investments he couldn't bring himself to sell - his colleagues eventually forcibly closed his positions.
Paul followed up his loss by studying how the pros MAKE money. What he found was what we all find if we read personal finance or investing books: a million different contradictory ways to do it. He refocused and studied how people LOSE money, and found there are only a few ways: people personalize the market and their investments, internalize what should be external losses (they take losses personally), confuse different types of risk, and trade with the crowd.
How can you avoid all this? Easy: have a plan and stick to it.
This was a great book for me to read right now. Most of my personal plan aligns with the low-maintenance index fund strategies from Millionaire Teacher (fantastic book - similar to Canadian Couch Potato), but I've dabbled with mixed success in a few stocks. I realize now that I have not been fully planning these purchases (all you need is entry point, price objective, and stop limit to limit losses). Sticking to an investment plan is a way to depersonalize losses. You'll win some and lose some, but sticking to a plan ensures you don't go down with a sinking ship. Planning makes the difference between investing/speculating, and gambling/betting.
Hard to find in Saskatoon - doesn't exist in the public library system. Robyn borrowed a copy from SIAST in PA via the U of S library.
January 18, 2022
It's an okay book, nothing really new is discussed. It essentially says we lose everything when we
1. Follow the crowd (aka get into trades due to FOMO)
2. Be unclear on type of activity you are doing (e.g. convert a short term investment into a long term one because it has lost money)
3. Personalize loses (i..e your ego takes over and you can't accept a loss because it would be you are wrong and so you keep your position open).
Wouldn't really recommend reading this book except to absolute beginners - I think there are better books on psychology of investing or trading (e.g. Thinking Fast and Slow is great one, though not fixated on trading specifically).
1. Follow the crowd (aka get into trades due to FOMO)
2. Be unclear on type of activity you are doing (e.g. convert a short term investment into a long term one because it has lost money)
3. Personalize loses (i..e your ego takes over and you can't accept a loss because it would be you are wrong and so you keep your position open).
Wouldn't really recommend reading this book except to absolute beginners - I think there are better books on psychology of investing or trading (e.g. Thinking Fast and Slow is great one, though not fixated on trading specifically).
June 20, 2016
“Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky. They think their mere involvement in an undertaking guarantees success.”
― Brendan Moynihan, What I Learned Losing a Million Dollars
“Profitable trades” that are missed actually cost zero while poor controls (pick the stop later) or no controls (no stop) will sooner or later cost you a lot of money.”
― Brendan Moynihan, What I Learned Losing A Million Dollars
“Man is extremely uncomfortable with uncertainty. To deal with his discomfort, man tends to create a false sense of security by substituting certainty for uncertainty. It becomes the herd instinct. —BENNETT W. GOODSPEED, THE TAO JONES AVERAGES”
― Brendan Moynihan, What I Learned Losing A Million Dollars
“Experience is the worst teacher. It gives the test before giving the lesson. —UNKNOWN”
― Brendan Moynihan, What I Learned Losing A Million Dollars
― Brendan Moynihan, What I Learned Losing a Million Dollars
“Profitable trades” that are missed actually cost zero while poor controls (pick the stop later) or no controls (no stop) will sooner or later cost you a lot of money.”
― Brendan Moynihan, What I Learned Losing A Million Dollars
“Man is extremely uncomfortable with uncertainty. To deal with his discomfort, man tends to create a false sense of security by substituting certainty for uncertainty. It becomes the herd instinct. —BENNETT W. GOODSPEED, THE TAO JONES AVERAGES”
― Brendan Moynihan, What I Learned Losing A Million Dollars
“Experience is the worst teacher. It gives the test before giving the lesson. —UNKNOWN”
― Brendan Moynihan, What I Learned Losing A Million Dollars
February 5, 2019
Started this book a long time ago and after about 20% of the way through left it. While reading Black Swan by Nassim Taleb, book is mentioned in affectionate way so I came back to it from beginning. Made it through book very quickly. It's entertaining and if your investor almost mandatory read. You'll identify with a lot of it if you've had money in markets and experienced some wins and losses.
November 19, 2018
A short read and a valuable one. Interesting how it happened in a pretty simple way. What is more enjoyable is what is examined and studied after the loss. Last chapter has some good stuff around risk management and psychology.
December 12, 2013
Recommended in the Black Swan
Disappointing , few ideas, nothing new
Disappointing , few ideas, nothing new
January 14, 2022
This book was actually much better than I thought it would be. To tell the truth, I knew nothing about it except the title. I can't remember why it was even in my wishlist. I thought it would deal with entrepreneurship/business, but it deals with investing. This suits me, since I'm starting to get more into that (recently bought The Intelligent Investor, which I should probably tackle soon).
It was also written in the early 90's, so it is interesting to compare with today (and see how timeless many of these lessons are).
The book starts with a general run-down of the author's life, which is quite interesting, although I was afraid that would be all, but right after that, it lists all the contradictory advice that great investors have given over the years. This section alone is probably worth the price of the book. The only one I remember off the top of my head is how Warren Buffett said Diversification is for idiots, while John Templeton said to always diversify.
The final section deals how, if there is no real way to make money, what all the great investors have in common is they don't lose money, and it discusses the details as to how to go about that.
Some of my notes:
Need to decide: Will I be an investor or speculator?
Will I invest in stocks, bonds, currencies, futures (crypto)? (must be compatible with time horizon)
Pick the loss side first (pick where (price), when (time), or why (new information) you will get out of the position).
Pick stop, entry, then price objective.
Gambling is usually over one event (one race, one fight, one spin at the wheel, etc.). What if they stopped a horse race mid-way and you could decide to bet more, take your money out, etc.? This happens continuously with stocks.
Most investments are trades that didn't work (started as a trade, lost money, suddenly the time horizon stretched out since no one likes to take money out at a loss).
It was also written in the early 90's, so it is interesting to compare with today (and see how timeless many of these lessons are).
The book starts with a general run-down of the author's life, which is quite interesting, although I was afraid that would be all, but right after that, it lists all the contradictory advice that great investors have given over the years. This section alone is probably worth the price of the book. The only one I remember off the top of my head is how Warren Buffett said Diversification is for idiots, while John Templeton said to always diversify.
The final section deals how, if there is no real way to make money, what all the great investors have in common is they don't lose money, and it discusses the details as to how to go about that.
Some of my notes:
Need to decide: Will I be an investor or speculator?
Will I invest in stocks, bonds, currencies, futures (crypto)? (must be compatible with time horizon)
Pick the loss side first (pick where (price), when (time), or why (new information) you will get out of the position).
Pick stop, entry, then price objective.
Gambling is usually over one event (one race, one fight, one spin at the wheel, etc.). What if they stopped a horse race mid-way and you could decide to bet more, take your money out, etc.? This happens continuously with stocks.
Most investments are trades that didn't work (started as a trade, lost money, suddenly the time horizon stretched out since no one likes to take money out at a loss).
September 7, 2020
The advice in this book boils down to:
- You can't reliably predict profits but you can consistently manage losses
- You can't manage your losses if you personalize them
- To avoid personalizing losses you need a plan
- To have a plan you must have an exit strategy before entering the market
This is all summed up nicely in the very last chapter, while the rest of the book is spent building up to it. One *could* read just the last chapter and get most of the books' message, but I think it's still worth reading in its entirety because the examples are quite poignant and at 180 pages it is a short read anyway.
The first chapter (where the author talks about his life) was a slog for me. We all know the trope of the "Midas" trader suddenly losing everything… and he's also just a regular guy trading lumber, so it's never as entertaining and bombastic as the likes of The Wolf of Wall Street. His story is instead quite pedestrian: white guy in finance fails upwards until he fails big time and he's forced to reckon with the fact that his success is more attributable to luck than talent. The tone switches completely from the second chapter and the book becomes much drier, the author gets serious and writes with more competence and introspection. Suddenly the fact that he's not so special becomes a strength: because he failed due some basic human tendencies, like personalizing his wins and losses, you'll probably recognize yourself to a scary degree. At that point you'd better start listening because his advice is sound!
- You can't reliably predict profits but you can consistently manage losses
- You can't manage your losses if you personalize them
- To avoid personalizing losses you need a plan
- To have a plan you must have an exit strategy before entering the market
This is all summed up nicely in the very last chapter, while the rest of the book is spent building up to it. One *could* read just the last chapter and get most of the books' message, but I think it's still worth reading in its entirety because the examples are quite poignant and at 180 pages it is a short read anyway.
The first chapter (where the author talks about his life) was a slog for me. We all know the trope of the "Midas" trader suddenly losing everything… and he's also just a regular guy trading lumber, so it's never as entertaining and bombastic as the likes of The Wolf of Wall Street. His story is instead quite pedestrian: white guy in finance fails upwards until he fails big time and he's forced to reckon with the fact that his success is more attributable to luck than talent. The tone switches completely from the second chapter and the book becomes much drier, the author gets serious and writes with more competence and introspection. Suddenly the fact that he's not so special becomes a strength: because he failed due some basic human tendencies, like personalizing his wins and losses, you'll probably recognize yourself to a scary degree. At that point you'd better start listening because his advice is sound!
August 27, 2022
As the author Nassim Taleb recommends, reading a kind of book such this gives you more insight about success by understanding failure.
I first heard this book when I was reading one of the books by Nassim Taleb where he talks about the idea that you can get more control of failure by knowing why others failed than asking the reverse and recommends some books including this one. I thought it as a good idea so I finally tried reading it to get some value out of this book.
Though this book deals mostly with trading business, it didn't fail me to realize some points that I could apply in other ventures or investments. I remember I was somewhat resolved to set my limit loss and gain before going in the trading, but then during the trade, the adrenaline rush started to kick in where fear and greed drove my mental faculty to lose my resoluteness to the point that I couldn't have firm decision to pick which would be enough.
This book made me consciously aware that in the world of trading, investment, and other businesses, understanding the psychology of the crowd matters more than dealing this subject with hard sciences.
I first heard this book when I was reading one of the books by Nassim Taleb where he talks about the idea that you can get more control of failure by knowing why others failed than asking the reverse and recommends some books including this one. I thought it as a good idea so I finally tried reading it to get some value out of this book.
Though this book deals mostly with trading business, it didn't fail me to realize some points that I could apply in other ventures or investments. I remember I was somewhat resolved to set my limit loss and gain before going in the trading, but then during the trade, the adrenaline rush started to kick in where fear and greed drove my mental faculty to lose my resoluteness to the point that I couldn't have firm decision to pick which would be enough.
This book made me consciously aware that in the world of trading, investment, and other businesses, understanding the psychology of the crowd matters more than dealing this subject with hard sciences.
April 6, 2021
This book is amazing in every sense, this book will surely churn your stomach out and put you in very uncomfortable situation if you have had big stock market losses but what is mentioned in this book is so true. It is a book revolving around the author's personal catastrophic loss in the stock market and all the important timeless lessons regarding trading psychology, risk, uncertainty,volatility, and planning which he had put in a very detailed and thoughtful way.
We often think we are investing in market but 95% are just in the market for speculation, betting, and gambling. It is something we must acknowledge and accept that real investing is very boring.
We often think we are investing in market but 95% are just in the market for speculation, betting, and gambling. It is something we must acknowledge and accept that real investing is very boring.
April 9, 2021
Highly recommend it! Takes a different approach than most finance books. The book is divided in three vastly different and well thought out parts.
The first part is an entertaining auto biographical account of his life story rising through the ranks, this was the highlight for me, lots of funny stories and the unique way he saw the world. Main takeaways were: his merit in seeing everything in life as a game (learn the rules and win), and his arrogance and blindsided ambition that led to his downfall was due to getting lucky multiple times even when he made the wrong decisions.
The second part talks about the lessons learned from his ultimate downfall, this is the meaty content with good takeaways for investing and IMO applicable in life as well. In a nutshell.... there are different and oftentimes contradictory ways to win, successful people and experts out there will greatly differ in their methods, but one thing they all agree on, is the importance of not losing big. He goes in depth providing examples on the human phsychology affecting our decisions, great stuff!
Third part is a summary tying it all together.
This book is a good addition to the the works of Nassim N. Taleb. What if instead of trying to copy other people`s method which worked under very specific circumstances, we learned more lessons on what to avoid doing? The wise man learns from the mistakes of others.
The first part is an entertaining auto biographical account of his life story rising through the ranks, this was the highlight for me, lots of funny stories and the unique way he saw the world. Main takeaways were: his merit in seeing everything in life as a game (learn the rules and win), and his arrogance and blindsided ambition that led to his downfall was due to getting lucky multiple times even when he made the wrong decisions.
The second part talks about the lessons learned from his ultimate downfall, this is the meaty content with good takeaways for investing and IMO applicable in life as well. In a nutshell.... there are different and oftentimes contradictory ways to win, successful people and experts out there will greatly differ in their methods, but one thing they all agree on, is the importance of not losing big. He goes in depth providing examples on the human phsychology affecting our decisions, great stuff!
Third part is a summary tying it all together.
This book is a good addition to the the works of Nassim N. Taleb. What if instead of trying to copy other people`s method which worked under very specific circumstances, we learned more lessons on what to avoid doing? The wise man learns from the mistakes of others.
March 8, 2020
fun read for those who equate luck with their own skill -- am personally guilty of such a track record.
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