Lessons From Losing Big

What I Learned Losing a Million Dollars is easily one of the most underrated investment books I’ve come across. The book was actually first published in the early 1990s but re-released a few years ago. It tells the story of Jim Paul, a former futures trader on the Chicago Mercantile Exchange who made a sizeable amount of money at a young age, but lost it all following a series of bad breaks and poor choices.

It’s one of the most honest investment books I’ve ever read. It deals with hubris, overconfidence, luck and the multitude of psychological factors we’re all forced to deal with when trying to make rational decisions.

I’m a huge fan of the mindset of process over outcomes and this book is full of useful nuggets of wisdom on this subject. I go back through my highlights from this book on regular basis. What follows are some of my favorites.

Why people make poor decisions:

People lose money in the markets either because of errors in their analysis or because of psychological factors that prevent the application of the analysis.

Experience can be overrated:

Experience is the worst teacher. It gives the test before giving the lesson.

On self-attribution bias:

Personalizing successes sets people up for disastrous failure. They begin to treat the success as a personal reflection 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.

On confirmation bias:

There’s nothing worse than two people who have on the same position talking to each other about the position

On the rush we receive from making money:

The high from “being right” the market and making all that money is unbelievable. It cannot be duplicated with drugs. You are totally invincible. You are impervious to all pain. There’s nothing bad in the world.

On the thrill of victory and the agony of defeat:

When I was making money, I couldn’t wait for the market to open. When I was losing money, I couldn’t wait for it to close.

On anchoring:

Time is very painful when you’re losing money. All I wanted was for the market to rally back to the August highs, and I’d get out.

On luck, process and losses:

People tend to regard the words loss, wrong, bad, and failure as the same, and win, right, good, and success as the same. For instance, we lose points for wrong answers on tests in school. Likewise, when we lose money in the market we think we must have been wrong. However, in the markets losses should be viewed like the light bulbs or rotten fruit mentioned earlier: part of the business and taken with equanimity.

On process vs. outcomes:

In 20/20 hindsight, decisions might be good or bad but not right or wrong.

On managing money for risk, not returns:

All you can actually determine is the amount of your exposure as opposed to the probability that the market will or will not go to a certain price. Therefore, all you can do is manage your exposure and losses, not predict profits.

On the need to be right:

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?

Emotions are what make us human so learn to deal with them:

Emotions are neither good nor bad; they simply are. They cannot be avoided.

On the importance of having a plan:

A plan, the noun, is a detailed scheme, program, or method worked out beforehand for the accomplishment of an objective. To plan, the verb, means to think before acting, not to think and act simultaneously nor to act before thinking.

It’s not about right or wrong, it’s about good or bad decisions:

Doing the “wrong thing” (i.e., breaking your rules) in the markets and still being rewarded means you will repeat behavior that may or may not have been responsible for the profitable trade or investment.

On sticking with your plan:

Any deviation from your plan triggers the potential for losses due to psychological factors.

The entire book is worth a read to gain a better sense of the context behind some of these quotes:
What I Learned Losing a Million Dollars

 

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