Book Summary: What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan
“Success always obsoletes the behavior that achieved it.” – Peter Drucker
A meteoric rise often triggers a precipitous fall due to the psychological effects of success.
Diversify—unless you know something about a very narrow position.
Don’t average down to reduce losses in a bad position.
Don’t try to bottom-fish.
Don’t try to buy at the bottom or sell at the top.
Advice from the pros often contradicts itself regarding how to make money in the market.
The key to making money in the market is to avoid losing money. There are many ways to make money in the market, but relatively few ways to lose money.
There are two types of losses: internal and extertal. Internal losses are subjective, external losses are objective. When a loss becomes subjective, your ego gets involved.
Market losses are subjective and open-ended, and therefore get internalized. This leads to people going through the five stages of grief: denial, anger, bargaining, depression, and acceptance.
A better bets on the outcome of a single event. A gambler derives pleasure from a given activity or event. A speculator believes he or she can “see” the outcome of a particular position, and therefore is seeking money and not pleasure. A trader tries to earn money by exploiting the bid-ask spread (short time horizon). An investor seeks money and has a longer time horizon.
Games can take the form of either discrete events (e.g. the roulette wheel) or a continuous system (e.g. the stock market).
Individual behavior vs. crowd behavior: crowds display psychological characteristics that go beyond what the individual would do. These characteristics of a crowd include impulsiveness, irritability, incapacity to reason exaggeration. Crowd behavior does not necessitate a crowd-for example, an individual can exhibit the traits of a crowd-based trade. Crowds can be overcome by panics and mania.
Security analysis doesn’t tell you what to do when to do it. You need a set of rules to be a successful speculator.
Being in the markets is about decisions. There is no perfect decision, they all have their trade-offs.
Controls should precede strategy. You cannot predict your profits, but you can manage your losses. Pick your exit loss criterion before you determine your entrance price.
Form a contingency plan by doing scenario analysis.
Test your assumptions. Do not use inductive reasoning— using events to support your judgment after the fact—instead of deductive reasoning.
Go with your feelings. Stay with positions that you feel good about, and get out of positions that make you feel bad.
Figure out decide what your stop loss is before you enter into a position. Have a plan and stick to it.
The Midas touch syndrome: when a string of successes makes you predisposed to sudden and large scale failure. Avoid personalizing losses and gains to avoid this trap.
Focus on doing right, not being right. This is what separates a good decision-maker from a bad one.
The book is split into two parts. The first is the story of the successes and eventual failure of the author, Jim Paul. While interesting, I could have done without the story personally. That being said, the second half is the real meat of this book and well worth the price of admission if you have any interest in trading or investing.