What I Learned From Losing A Million Dollars Summary (8/10) — Unearned Wisdom

The central message of What I Learned From Losing a Million Dollars by Jim Paul is: don’t take success personally.

Entrepreneurs and traders are sure to fail if they do take success or failure personally. Why a Book on Losing? A lot of people have made money, but everyone has lost money, so it’s clear that everyone can benefit from learning about how not to lose money. When people lose, they usually think it’s the method that is defective. They often buy books with “rags to riches” stories, as if they had the secrets of success by telling people about the habits of the wealthy.

Fundamentalist or Technician?

“I haven’t met a rich technician. “ — Jim Rogers

“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.” — Marty Schwartz

Not very encouraging! Okay, so maybe the key to success wasn’t whether you were a fundamentalist or a technician. I mean, I had made a lot of money using both of these methods. While I found technical analysis indispensable, there was nothing like a good fundamental situation to really make a market move. Maybe another topic would begin to reveal the pros’ secret.

Diversification or Concentration?

“Diversify your investments. “ — John Templeton

All right! Now I was getting somewhere. This was striking a familiar chord. Maybe I had placed too much emphasis on the soybean oil spreads. I had too large a percentage of my capital committed to that market and that trade. Even afterwards, I was trading only one market at a time.

This looked like my first lesson from the masters: diversify. Or it looked that way until I read the following: “Diversification is a hedge for ignorance. “ — William O’Neil

“Concentrate your investments. If you have a harem of 40 women you never get to know any of them very well.” — Warren Buffett

Buffett has made more than $1 billion in the market. Who was I to disagree with him? But Templeton is also one of the greatest investors alive and he said something totally opposite of Buffett

Okay, so maybe diversification wasn’t the answer either. Maybe you could put all of your eggs in one basket and still get rich by watching the basket very closely. Perhaps the topics I had selected so far were too broad in their implications.
Certainly the pros would agree on the more specific and practical applications of investment and trading mechanics.

Top and Bottom Picking

“Don’t try to buy at the bottom or sell at the top. “ — William O’Neil

“Maybe the trend is your friend for a few minutes in Chicago, but for
the most part it is rarely a way to get rich. “ — Jim Rogers

“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops.” — Paul Tudor Jones

Spreading Up

“When you’re not sure what is going to happen in the market it is
wise to protect yourself by going short in something you think is
overvalued.” — Roy Neuberger

“Whether I am bullish or bearish, I always try to have both long and
short positions- just in case I’m wrong. “ — Jim Rogers

“I have tried being long a stock and short a stock in the same industry
but generally found it to be unsuccessful. “ — Michael Steinhardt

“Many traders have the idea that when they are in a commodity (or stock), and it starts to decline, they can hedge and protect themselves, that is, short some other commodity (or stock) and make up the loss. There is no greater mistake than this. “ — W.D.Gann

As you can see, the pros don’t agree on anything. Paul concludes that since they are successful, it’s not the making-money that mattered, but avoiding loss that did.


My basic advice is don’t lose money. — Jim Rogers

“I’m more concerned about controlling the downside. Learn to take the losses. The most important thing in making money is not letting your losses get out of hand. — Marty Schwartz

“I’m always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have. — Paul Tudor Jones

One investor’s two rules of investing:
1. Never lose money.
2. Never forget rule #1.” — Warren Buffett

“The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.” — William O’Neil

“Learn how to take losses quickly and cleanly. Don’t expect to be right all the time. If you have a mistake, cut your loss as quickly as possible. “

Now I was getting somewhere. The pros consider it their primary responsibility not to lose money.

It’s important to learn how not to lose, because if you don’t, you may spend your whole life looking for new ways to make money without mastering a single one, and never learn the most important thing.

If you do learn why people lose and cut losses, then profits will follow. There will always be losses, of course, but the point is to think about avoiding the losses that sneak up on you, because those are the ones that wipe you out.

Losing money in the markets is the result of either: (1) some fault in the analysis, or (2) some fault in its application. As the pros have demonstrated, there is no single sure-fire analytical way to make money in the markets. Therefore, studying the various analytical methods in search of the “best one” is a waste of time. Instead, what should be studied are the factors involved in applying, or failing to apply, any analytical method.

More Unthinking Proverbs

“Don’t discuss market positions because the pros don’t,” won’t automatically make you a pro. You must understand those principles before you can benefit from the maxims. Pros don’t discuss their positions because they understand what triggers discussing positions in the first place, as well as the dangers of doing so. A maxim is a succinct formulation of some fundamental principle or rule of conduct. Memorizing and repeating cliches is easy; grasping their underlying principles is more difficult.

“Cut your losses short” sounds great, but it’s not so straightforward to apply. When do you cut your losses? As soon as your market position shows a loss? And what counts as a loss? How do you define a market loss? At some point, every investment is going to show a loss, so how do you separate a real loss from a fake loss?

Or how about: “Don’t follow the crowd. Go against the herd.” Okay, but how do you measure the crowd’s position in the market? What are the truest bellwethers of public sentiment? Do you determine what the crowd is doing by looking at volume and open interest? Put-call ratios? Put-to-call premiums? Consumer confidence? Odd lot shorts? Sentiment numbers and consensus of investment advisors? Besides, doing the opposite of what everyone else is doing doesn’t guarantee success and there are times when “trading opposite the crowd” can wipe you out.

Finally, there’s the oldie but goldie: “Don’t trade on hope or fear or make emotional decisions.” Sounds simple but emotions of hope and fear that are intrinsic to the brain make that kind of hard to do.

Below are a few examples of the psychological fallacies most people have when it comes to risk and probability.

1. The first psychological fallacy is the tendency to overvalue wagers involving a low probability of a high gain and to undervalue wagers involving a relatively high probability of low gain. The best examples are the favorites and the long shots at racetracks.

2. The second is a tendency to interpret the probability of successive independent events as additive rather than multiplicative. In other words, people view the chance of throwing a given number on a die to be twice as large with two throws as it is with a single throw — like throwing sixes four times in a row in craps and thinking that must mean their chances of throwing a seven next have improved.

3. The third is the belief that after a run of successes, a failure is mathematically inevitable, and vice versa. This is known as the Monte Carlo fallacy. A person can throw double sixes in craps ten times in a row and not violate any laws of probability, because each of the throws is independent of all others.

4. Fourth is the perception that the psychological probability of the occurrence of an event exceeds the mathematical probability if the event is favorable and vice-versa. For example, the probability of success of drawing the winning ticket in the lottery and the probability of being killed by lightning may both be one in 10,000; yet from a personal viewpoint, buying the winning lottery ticket is considered much more probable than getting hit by lightning.

5. Fifth is people’s tendency to overestimate the frequency of the occurrence of infrequent events and to underestimate that of comparatively frequent ones, after
observing a series of randomly generated events of different kinds with an interest in the frequency with which each kind of event occurs. Thus, they remember the “streaks” in a long series of wins and losses and tend to minimize the number of short- term runs.

6. Sixth is people’s tendency to confuse the occurrence of “unusual” events with the occurrence of low-probability events. For example, the remarkable feature of a bridge hand of thirteen spades is its apparent regularity, not its rarity (all hands are equally probable). As another example, if one holds a number close to the winning number in a lottery, he tends to feel that a terrible bad stroke of misfortune has caused him just to miss the prize.

Originally published at https://unearnedwisdom.com.



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Sud Alogu

I write about ideas that matter to me. In other words, revolutionary.