I’ve been reading What I learned Losing a A Million Dollars by Jim Paul and Brendan Moniyhan – it’s a book about the psychological factors that come in to play when we make decisions.
I first came across What I learned Losing a Million Dollars after hearing Moniyhan interviewed on Tim Ferriss’ podcast. In the podcast Moniyhan broke down the key lessons from the book which are “less about investing and more about the psychology of the mistakes we made.”
The key theme of What I learned Losing a Million Dollars is that:
“there are 1,000,000+ ways to make money in the markets (and many of the “experts” contradict one another), but all losses appear to stem from the same few causes. So why not study these causes to help improve your odds of making and keeping money?”
Ferries holds the book in high regard. He credits in part What I learned loosing a million dollars to roughly half his net worth [given Tim Ferriss is worth around $20m it must be good book]
The book is half biography and half easy to read psychology text book. Telling the story of how Jim Paul made a fortune, became Governor on the Chicago Board of Trade and almost as quickly as he made it, he lost it all. Job, money, reputation.
It’s a frank and honest assesment of his situation. From the age of 9, whilst working as a golf caddy at his local country club, when he realised that it wasn’t so important what you did but how much you were paid doing it. To the realisation that losing money in the markets is the result of either: (1) some fault in the analysis or (2) some fault in it’s application. Jim breaks down the circumstances which led to his $1.6m loss and the key lessons he learned from it.
Paul and Moniyhan illustrate the fact that you shouldn’t take things personally by way of recounting the stories of Thomas Edison and comparing it to Henry Ford.
Edison, as we all know failed around 10,000 times before finding the right filament to make an electric lightbulb.
But on the day his Menlo Park Laboratory burnt down a reporter asked him what he was going to do.
“Start rebuilding tomorrow” came the reply.
Edison succeeded in part because he didn’t take failure or losses personally.
Ford on the other hand started in 1905 with nothing and in 15 years built the largest and most profitable manufacturing business in the world. But a few years later the business empire was in a mess and went on to lose money for the next 20 years.
Ford was well known for being uncompromising to his opinions. It’s possible that the business lost so much money because he took his earlier success personally and came to think he could do no wrong.
Personalising success sets people up for failure. They begin to treat the successes totally as a reflection of their abilities rather than the result of capitalising on a great opportunity and being in the right place at the right time. (Or maybe it was just down to luck).
You’ve seen it before that someone makes a fortune in one business, only to go and lose it in the next.
Gambling, Trading and Speculating
Sometimes, when we think we are doing one thing (like investing or trading) we are actually doing something else (like speculating).
The big difference between gambling, trading and speculating is: gambling creates risk while investing/speculating assumes and manages risk that already exists.
Each one is fine on it’s own, if you know that’s what you’re doing. For example when you go to the casino, deep down you know it’s really for entertainment. You are not investing your earnings with the expectation you’re going to be making your fortune are you?
“Without a plan, you fall into one of two categories: a bettor, if your main concern in being right, or a gambler, if your main concern is entertainment.”
Don’t Confuse Skill with Luck
Another lesson that I’ve taken away is confusing luck with skill. Don’t kid yourself that you’re skilful when really it’s luck that’s making you money.
In fact, the chances are the longer that you are in being successful at doing something, then keep in mind that your success might be more down to luck than it is down to your level of skill.
It’s fine to be lucky, but recognise it for what it is.
Listen to Herb Kelleher, former CEO of Southwest Airlines:
“I think the easiest way to lose success is to become convinced that you are successful”
These lessons aren’t just for the financial markets. The story might be told through a trader, the lessons can be applied to a great many situations and markets and apply equally every day whenever you’re making decisions.
When you’re doing one thing and thinking it’s the other, it’s a sure sign you’re going to loose money. Be certain about what your position is, before you commit your money.
It’s a good book, full of nuggets of wisdom that apply to every day life. You should check it out What I learned Losing a Million Dollars.
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