What I learned losing a million dollars

I dagens inlägg hoppas jag att det kan bjudas på lite tänkvärda delar när det kommer till investeringar och risktagande.

Inlägget är huvudsakligen på engelska och baseras på boken What I learned losing a million dollars. Det är en bok som är skriven av Jim Paul och Brendan Moynihan. Jag tycker att det var en läsvärd bok som bjöd på en del tänkvärda delar.

Nedan är mina anteckningar som jag skrev ner när jag läste boken.

Short introduction to Jim Paul

Jim got his first job as a caddy on the golf course when he was nine years old. Then he got his fascination for money. He came from a home where there was no money for extravagance. 

Jim worked extra throughout his school years. At one time, beside school he was working 55 hours a week. Most of his high school time he focused on the social aspects and hence missed a lot of classes. Despite this he managed to graduate in 1965.

Jim got a job as a trader, and everything just went better and better for him. He made a lot of money. But luck was a big part. The successes in his life had given him a false sense of omniscience and infallibility. The vast majority of the successes in his life were because he got lucky, not because he was particularly smart.

However, eventually the success journey came to a halt. Jim started to go against basic trading rules. Eventually things started to go bad for real. In less than three months he lost all his money speculating on bean oil. He borrowed more money to cover margin calls but eventually he couldn’t keep the noose over the water anymore and his positions and account was liquidated in a margin call.

In summary: In the mere seventy-five days, Jim experienced the collapse of his fifteen years career and lost over one million dollars.

Despite this, Jim didn’t decide to quit trading. He decided to quit losing. He started to try to learn what made the successful investors successful. However, those people gave very different and conflicting advice. One could say you should diversify, and one could say you should absolutely not diversify. If the winners are so conflicting in their advises, how can anyone learn from them?

Jim then changed focused from trying to understand how to win to try to learn to avoid losses.

More notes from the book

• A brain surgeon would never go to a bookstore, lend a book and read it during the weekend and then start doing surgeries on Monday. In the investment world, a person could borrow a book about trading and come back on Monday start to trade.
• Trading is one of the few businesses where temporarily success could be confused by pure luck. With no knowledge you would never be able to achieve any sort of success if you did a brain surgery. In trading, you can temporarily be successful even without any major knowledge, since trading is only about buying or selling a security etc.
• Successful trading is mostly about learning how to handle your losses
• Trading is also more about psychology than coming up with great strategies
• To lose is part of the game
• Success can be built upon repressed failures when the failures aren’t taken personally 
• Failure can be built upon repeated successes when the successes are taken personally 
• There are many ways to make money on the stock market. However, there are mainly only two ways to lose money: You are wrong in your analysis, or you follow short due to physiological factors that prevent the application of the analysis
• Personalising successes sets people up for disastrous failure. They begin to treat the success as a personal reflection rather than the result of capitalising on good opportunities, being at the right place at the right time or just being plain lucky
• An easy way to lose success is to become convinced that you are successful 
• It is more important to work smart than hard
• One of the oldest rules of trading: if a market is hit with very bullish news and instead of going up, the market goes down, get out if you are long. An unexpected and opposite reaction means there is something seriously wrong with the position
• Don’t focus on making money, focus on protecting what you have
• There are many ways to gain money on the stock market. It is far more important learning how to not lose money than to learn how to earn money
• Many people equate loss with being wrong and therefore internalise what should be an external loss
• External losses are objective and internal losses are subjective 
• Loss is not the same as wrong, and loss is not necessarily bad. Even though many people tend to see loss, wrong, bad and failure as the same thing

• Most people don’t know whether they are investing, speculating, or gambling, and to the untrained eye the activities are very similar
• 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
• The basic distinction between the individual and the crowd is that the individual acts after reasoning, deliberation, and analysis; a crowd acts on feeling, emotion, and impulses
• Emotions per se are not good nor bad. They just are. It is emotionalism that should be avoided
• Hope and fear are the strongest responses to an uncertain future
• When dealing with the risk of uncertainty of the future, you have three choices: engineering, gambling or speculating. The engineer knows everything he needs to know for a technologically satisfactory answer to his problem. He builds safety margins into his calculations to eliminate any fringes of uncertainty
• Investors, speculators and traders on the market is all part of being a Speculator
• If you express an opinion about the market, you have gotten yourself personally involved and may let your value about yourself be determined of if you are right or wrong
• You can’t calculate the probability of a trade being profitable; you can only calculate your exposure. So all you can do is to manage your losses. You cannot predict your profits
• By in advance determine rules when you will get out making increment go from a continuous process to a discrete process. You have then at start agreed upon how much you are willing to lose
• The failure to have, and follow, a plan is often the root cause for losing money in the market
• If you deviate from your plan you are playing with a lighted fuse. Sure, the bomb may not go off in any particular battle, but before the war is over the bomb will explode in your face
• In all risk taking it is the loss side on which you must focus first
• There are no secrets to success. The formula for failure is not lack of knowledge, brains, skill or hard work, and it is not lack of luck; it is personalising losses. It is refusing to acknowledge and accept the reality of a loss when it starts to occur because to do so reflect negatively on you

The five stages of internal loss

• Denial: you might listen only to people who share your view and ignore people with different opinions
• Anger: when the denial stage cannot be maintained any longer it is replaced with feelings of anger. For example, you become angry with the CEO or start yelling at your family
• Bargaining: You try to get into some kind of agreement to postpone the inevitable to happen
• Depression: You distance yourself from loved ones, get disturbed eating habits etc
• Acceptance: You resign to the inevitable