What I Learned Losing a Million Dollars (1994) Book Insights
Publication date: 1994
Author name(s): Brendan Moynihan and Jim Paul
Table of Contents
- 1 About the author
- 2 Brief summary
- 3 Who is this book for?
- 4 Buy book
- 5 Disclaimer
- 6 Key book insights and lessons
- 6.1 Introduction
- 6.2 The delusions of the rise
- 6.3 Employing logic and rationality in making investment decisions
- 6.4 The dangers of doubling down on investment decisions
- 6.5 Decisions on common fallacies lead to loss
- 6.6 Following the crowd can lead to terrible results
- 6.7 Make decisions based on a plan backed by a precise analysis
- 6.8 Have an exit strategy or consider the end in mind
- 7 Key quotes
- 8 Conclusion
Jim Paul (1943-2001) was first vice president in charge of the Morgan Stanley Dean Witter & Co. International Energy Unit in New York City. During his twenty-five-year career in the futures industry, he was a retail broker, floor trader, and research director and served on the Chicago Mercantile Exchange Board of Governors and the Executive Committee.
Brendan Moynihan is a managing director at Marketfield Asset Management LLC, where his understanding of markets and the media helps shape their macro views and allocations. He is an adjunct professor of finance at Vanderbilt University’s Owen Graduate School of Management. He is also the author of Financial Origami: How the Wall Street Model Broke. He lives in Barrington Hills, Illinois, with his wife and two sons.
What I Learned Losing a Million Dollars (1994) is a book based on the real-life story of Jim Paul, trader and investor, and his trading adventure in the stock market during the period of 1970 – 1983. The book emphasises on the psychological part of the trading process advocating that decisions based on emotions are more likely to lead to loses which can compound over time leading to a detrimental effect on the individual. It explains not only how to avoid losses but also why avoiding them is far more important than making money if you want to succeed.
Who is this book for?
Entrepreneurs, managers and anyone interested in making money by investing.
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Key book insights and lessons
The dot come bubble of the 1990s, and the 2008 financial crisis all have one thing in common: They were as a result of a group of people making a series of bad(usually emotional or irrational) decisions and doubling down on these. It is only a few people who endure huge financial loses after every bubble burst or financial crisis live to rise again, and John Paul is one of them.
Jim Paul’s rapid rise took him from a small town in Northern Kentucky to governor of the Chicago Mercantile Exchange. Despite all this, he made a series of mistakes that would lead him to his fortune, reputation and his job. Jim began his journey back to the top by analysing his previous behaviour and asking himself what psychological factors had shaped his decision-making. In the following larns, you will find the key differences between sound financial investments and gambling.
The delusions of the rise
One of Jim Paul’s hunger early in life was to make as much money as he could. A few years later, he fulfilled his dream and once made $248,000 in a single day. He was 6.3ft tall, had a beaming voice and oozed of self-confidence.
According to Bill Gates, “success can be a lousy teacher as it can seduce smart people to think they cannot lose” and Jim would later learn this. Jim landed a job in futures trading and was a popular figure in Chicago Mercantile Exchange. He felt on top of the world and was not shy to issue orders. He felt on top of the world, and his strong self-assurance would lead him to make bad financial decisions.
The demand for soybean oil was high, and supplies were running low. This lead to an increase in soybean oil prices and Jim spotting an anticipated rise in the market bought up positions in the market.
Jim was confident he was made the right decision in buying up positions in the soybean oil market and would persuade his customers, friends and even colleagues to join him with the assurance that they would be rich!
His decision seemed right for a few months, but soon the market began to turn because of a threat of grain sanctions, and bad weather, which damaged bean crops. His clients and colleagues began to close their positions, but Paul remained nonchalant and was losing $20,000 every day. He was convinced he made the right decision and those that left the trade would regret it when the markets turn for the good.
At the end, his manager who also seized his assets fired him. Jim lost $800,000 half of which he borrowed from friends.
Jim Paul lost his meteorically acquired fortune because he failed to face mounting losses. So why would a skilled trader like Jim stick to his guns when the markets showed clear signs that he would lose?
Employing logic and rationality in making investment decisions
It is not every decision that we make that lead to results we desire, so it is essential for us to spot our mistakes early instead of wallowing in ignorance or delusion.
Jim would later come to realise that understanding loss is a better way to get (and stay) rich than knowing how to make money.
There is no absolute trick to riches, and this is evident from the contradictory advice out there. However, one thing one of the most important thing about investing is not to lose money.
Warren Buffet, who has a net worth of over $60(Forbes, 2018) and is known as one of the fathers of value investing has a favourite rule of investing which is:
Rule No. 1: Never lose money. Rule No. 2: Do not forget rule No. 1”.
At first sight, this seems to contradict with another quote of his: “Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market”.
However, the contradiction can be reconciled if we recognise that there is a difference between seeing a decline in the value of your portfolio and losing money.
On Jim’s climb back to the top, he came to internalise the importance of understanding and dealing with a loss.
The dangers of doubling down on investment decisions
Losses are not fun but are part of the business of investing, therefore, should not be taken personally. However, the problem is most people often take losses personally which then lead them to act purely based on emotions, which can lead to irrational actions and even more losses.
Jim made a mistake with his position on the soybean oil market but decided to double down on his original decision because he did not want to admit he was wrong after every sign showed this.
This is in accordance with the consistency principle in psychology, which says that people tend to be consistent with prior acts and statements. Robert Cialdini, a famous psychologist, popularised this concept through his book ” Influence: Science and Practice” (1984).
Traders are supposed to follow the logic in making positions but they some can get emotional and end up losing money.
Decisions on common fallacies lead to loss
Let us examine a few common fallacies that are common with traders.
Common fallacy 1: Affirming the Consequent
Premise: Ducks are birds.
Premise: Ducks swim in the water.
Premise: Chickens are birds.
Question: Do chickens swim in water?
False conclusion: Chickens swim in the water.
The false conclusion affirms the consequent fallacy: not all birds swim in water; swimming is neither a necessary nor a sufficient condition to be the thing “bird”)
Common fallacy 2: Ad Hominem
Ad Hominem translates as “to the man” and refers to any attacks on the person advancing the argument, rather than on the validity of the evidence or logic. It has is one thing to say that I do not agree with you, but it is another thing to say that I do not like you, and you are wrong because I do not like you. Good people make invalid claims, and evil people often make valid claims, so it is important to separate the claim from the person.
With the case of Jim, he may not have closed his trade even after his clients and colleagues who also took positions in the soybean oil market cut their losses short. He was confident he was more experienced than they were and they would regret their decision when the market turned.
Other forms of fallacies include argument from authority, Emotional Appeals and more.
Being irrational in trading is very risky and so rationally and logically evaluating your decisions is not only essential but also taking appropriate steps to stop or prevent losses is essential.
Following the crowd can lead to terrible results
While millions of people lost money and properties in the 2008 financial crisis because they decided to act on the whims of the crowd, others utilised this opportunity and made a fortune because they took risks and went against the market.
For example, most people were selling their properties because they feared it would keep on reducing in value and those who bought these properties and kept them for two years later would go on to enjoy the appreciation in the property market.
Warren Buffet has a favourite quote, which says, “be fearful when others are greedy and greedy when others are fearful”.
The dotcom bubble in the 1990s showed people buying stocks in various internet companies with the hopes that they would increase in value, but this was merely because of the rush in the market. A few years later the market would crash leaving many bankrupt.
The bitcoin boom in 2017 saw people buy bitcoin at 17,000 mainly out of speculation that the price would rise and not because they believed in the technology or had reliable data to back their belief. However, a few weeks later, bitcoin price would drop causing many to lose money.
The fear of mission out (FOMO) has led many people to act purely based on emotions, and the hence follow the crowd to make irrational decisions which then lead to loses.
Many experienced traders know that following the crowd mentality can lead to terrible outcomes.
Make decisions based on a plan backed by a precise analysis
Having a plan is great, but a plan that is not analysed could lead to disastrous results. Great investments decisions are made from clear analysis of the opportunity and not just the crowd.
Have an exit strategy or consider the end in mind
Entering a trade is one thing but knowing when to leave is another. Most investors have lost money because they become too greedy, fearful or remained at a losing trade.
The dotcom bubble of the 1990s is another example of people being too greedy. The Internet was capturing the public imagination as a revolutionary technology that would change the world. Cashing in on the revolution was easy and merely involved people changing their business to an online model and raising funds (even without any apparent business plan or revenue). It was a grand “cannot lose” bull market until the supply exceeded demand and the bubble burst. Some traders who had an exit strategy and left the market at its peak made a fortune.
The skill of being a great investor involves knowing when to cut your losses, and knowing when to leave a trade.
This is why Warren Buffet who has been synonymous with buying stocks for the long term has sold some of his shares in a few companies.
These are some key quotes from the book:
“Experience is the worst teacher. It gives the test before giving the lesson. —UNKNOWN” ― Brendan Moynihan, What I Learned Losing A Million Dollars
“Speculating is the application of intellectual examination and systematic analysis to the problem of the uncertain future.” ― Jim Paul
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.
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
There’s nothing worse than two people who have on the same position talking to each other about the position.” ― Jim Paul
Financial losses spiral out of control when we make irrational decisions and double down on them instead of cutting our losses short.
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