What I Learned Losing a Million Dollars
What I Learned Losing a Million Dollars

What I Learned Losing a Million Dollars

Why is it is so important to learn how not to lose? (Location 1164)

On the other hand, if you learn why people lose and thereby control losses, profits will follow. (Location 1167)

Losing money in the markets is the result of either: (1) some fault in the analysis or (2) some fault in its application. (Location 1174)

Instead, what should be studied are the factors involved in applying, or failing to apply, any analytical method. (Location 1176)

Psychological factors can be categorized as either (1) the pathological mental disorders and illnesses that require professional help or (2) the psychological (Location 1179)

distortions all of us engage in even though we are basically mentally healthy. We are interested in the latter. (Location 1181)

Most people acknowledge that losses will happen regardless of the type of business venture. (Location 1254)

On the other hand, an internal loss is defined in terms of the individual (i.e., subject) experiencing it. (Location 1271)

Market losses are external, objective losses. It’s only when you internalize the loss that it becomes subjective. This involves your ego and causes you to view it in a negative way, as a failure, something that is wrong or bad. Since psychology deals with your ego, if you can eliminate ego from the decision-making process, you can begin to control the losses caused by psychological factors. The trick to preventing market losses from becoming (Location 1287)

Decision making is a process of reaching a conclusion after careful consideration; (Location 1297)

Therefore, decision making is not a choice between right and wrong. In 20/20 hindsight, decisions might be good or bad but not right or wrong. (Location 1298)

Market positions are either profitable or unprofitable, period. (Location 1300)

it is easy to equate losing money in the market with being wrong. (Location 1301)

Once a person has personalized a market position and it starts to show a loss, he is uncertain when or how it is going to end (just like the person with the terminal illness is uncertain what’s coming next) (Location 1356)

The markets fall into the category of continuous process because market positions have no predetermined ending point. (Location 1383)

Would you lose more money or less money at the racetrack if they stopped the race in the middle and reopened the betting window? (Location 1393)

People get on the wrong side of the market and they lose all their money. (Location 1417)

Not only had I failed to see that losses were just part of business, but I had gone so far as to personalize someone else’s losses. If only I had known then what I’m writing now (Location 1420)

Baccarat was neat. It’s been a game for the rich in France and Italy since the fifteenth century. (Location 1442)

In baccarat there are no decisions about the cards; the rules make all the decisions. The game is determined entirely by chance. (Location 1450)

Risk is defined as the possibility of suffering a loss. (Location 1471)

Investing is parting with capital in the expectation of safety of principal and an adequate return on the capital in the form of dividends, interest, or rent. (Location 1491)

investing indicates an intention to be separated from the capital for an extended period of time. (Location 1493)

Buying stocks in a pension fund with the intention of holding them indefinitely or buying bonds with the intention of holding until maturity is investing. (Location 1494)

Speculating is parting with capital in the expectation of capital appreciation. (Location 1502)

The word speculation is derived from the Latin word specere, which means “to see.” Speculating means vision, perception, the faculty of intellectual examination. (Location 1505)

He can be recognized by deliberate and extremely disciplined wagering. (Location 1541)

He concentrates on games where the element of skill is sufficient to produce the possibility of a player advantage, such as blackjack and parimutuel betting. (Location 1543)

They are dealing with an uncertain outcome and seek to profit from their ability to anticipate the future or to see the future—in other words, to speculate. (Location 1545)

He said “the relationship between gambling and entrepreneurship was an uneasy one” and confessed to behaving like a gambler in a business enterprise. (Location 1552)

If a person approaches a business risk or a risk in the financial markets for excitement, then he is gambling—regardless of how much control he supposedly has over the outcome. (Location 1555)

For instance, running a business keeps you continuously exposed to the risks coincident with the commitment of resources to future expectations. (Location 1564)

Betting and gambling are suitable for discrete events but not for continuous processes. (Location 1569)

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. (Location 1583)

The second is a tendency to interpret the probability of successive independent events as additive rather than multiplicative. (Location 1585)

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. (Location 1588)

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. (Location 1590)

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. (Location 1594)

Sixth is people’s tendency to confuse the occurrence of “unusual” events with the occurrence of low-probability events. (Location 1597)

The three-to-ten ratio has nothing to do with the probability that the stock can or will get to thirty-six dollars. (Location 1616)

But it doesn’t say anything about the probability of either event occurring. (Location 1618)

by Charles P. Kindleberger we find the Minsky Model: (1) Displacement—some exogenous event (war, crop failure, etc.) shocks the macroeconomic system. (2) Opportunities—the displacement creates profitable opportunities in some sectors of the economy and closes down other sectors. Investment and production focuses on the profitable sectors and a boom is underway. (3) Credit expansion—an expansion of credit feeds the boom. (4) Euphoria—speculation for price increases couples with investment for production/sale. (Location 1715)

Another common pattern used to describe the crowd overtaking a market is (1) speculation, (2) credit expansion, (3) financial distress, (4) crisis, (5) panic and crash. (Location 1720)

Certainty would replace probability. We wouldn’t have the potential for loss (i.e., risk). and, therefore, we wouldn’t have any risk activities, created or inherent. (Location 1908)

Successful investing is the result of successful speculation. If your “investment” is a stock, you are depending on the managers of the firm to accurately foresee the market for the goods it produces. (Location 1928)

A plan allows you to speculate with a long time horizon (as an investor), a short time horizon (as a trader), or on a spread relationship (as a basis trader or hedger). (Location 1943)

So you can be right and lose money. (Location 2113)

Remember, there are two kinds of reward in the world: recognition and money. (Location 2113)

Preoccupation with being right means you’re betting, which personalizes the market and is the root of losses due to psychological factors. (Location 2115)

to define a set of conditions under which you will enter and exit the market and whether you carry out that plan. (Location 2117)

Why? Games have rules and defined ending points. (Location 2150)

Speculating with betting or gambling. It also prevents you from betting or gambling on a continuous process. (Location 2152)

Mixing up the order of the process (i.e., acting then thinking), is betting or gambling. Trying to be right (i.e., betting) about an event that never ends means that you will never be completely right. (Location 2153)

Having a plan requires thinking, which only an individual can do—not a crowd. (Location 2155)

you could (1) make a crowd trade after falling into one of the crowd models previously outlined, then (2) confuse the different types of risk activities and wind up betting because you’re only interested in being right, and, finally, (3) personalize a loss when it develops and go through the Five Stages of Internal Loss. (Location 2170)

money. This is why you must determine your exit and entry criteria during the pretrade, objective time period when your thinking is clear. (Location 2189)

Another way of looking at it is: are you long because you’re bullish or bullish because you’re long? (Location 2207)

Thinking is no longer used as an exploration of the subject area but as an ego support device.” (Location 2212)

Using thinking in this manner is similar to the inductive decision making mentioned above: it starts with a conclusion and then looks for evidence to support it. (Location 2214)

Contrast her approach to that of most people who have prepackaged intellectual positions, views, opinions, and answers on almost every topic, gathered from television, newspapers, newsletters, and conversations. (Location 2224)

crowds always stand in need of ready-made opinions on all subjects. (Location 2228)

from answering until you can think about the subject. Following this approach keeps you objective (Rand’s philosophy is called objectivism, coincidentally enough), and your thinking can be used to explore the possibilities for an appropriate answer rather than supporting your ego after expressing an opinion. (Location 2231)

Participating in the markets is about making money; it’s about decision making implemented by a plan. (Location 2234)

think before you answer—if you even answer. (Location 2237)

“According to the method of analysis I use and the rules I use to implement the analysis, if the market does thus and such, I’ll do this. If the market does such and thus, I’ll do the other.” (Location 2238)

Taking either success or failure personally means, by definition, that your ego has become involved and you are in jeopardy of incurring losses due to psychological factors. (Location 2254)

Remember, Edison didn’t take the failures or losses personally, and he succeeded brilliantly (no pun intended). (Location 2256)

A person’s self image “should not be dependent on particular successes or failures, since these are not necessarily in a man’s direct, volitional control and/or not in his exclusive control. (Location 2261)

As we saw earlier, people lose in the markets not because of the particular type of method of analysis they use but because of the psychological factors involved in how they fail to apply their particular method. (Location 2269)

Participating in the markets without a plan is like ordering from a menu that has no prices and then letting the waiter fill out and sign your charge card receipt. (Location 2271)

Without a plan your losses grow while you’re being pushed and pulled around by price movements, random news events, and what other people say. (Location 2276)

If you find those losses intolerable, deal with them by reexamining your method of analysis and refining your rules, but not while you’re in the market. (Location 2279)

“What’s it gonna cost? When are you gonna get out?”20 Before beginning a mission in Bosnia, these senators wanted to know when or under what set of circumstances the mission would end. (Location 2285)

Johnson began to identify his personal worth with success in Vietnam. (Location 2299)

To take an example from business, look at powerhouse securities firm Morgan Stanley, one of the most profitable financial institutions (Location 2329)

It’s “avoided disasters and seized opportunities” because it is “fanatical about planning for any contingency, good or bad.” (Location 2332)

write detailed reports about all the consequences for the firm if certain hypothetical events came to pass. (Location 2334)

The worst-case scenarios are compiled in what the firm calls blue books. “‘We’re constantly writing these stupid blue books,’ grumbles one Morgan Stanley principal. ‘It definitely slows us down.’ (Location 2335)

“Gets down to what it’s all about doesn’t it? Making the wrong move at the right time. Like life I guess …” says Robinson to the dealer. (Location 2359)

A poker player risks his money not knowing the cards he will draw or what cards the other players will draw. (Location 2360)

Like the poker player, the investor risks his money not knowing how the individual company, stocks in general, or the economy as a whole will perform. (Location 2376)

disciplined consistency is the key to success in the markets once you’ve developed rules and made it a game. (Location 2377)

However, a plan is necessary for consistent loss control. (Location 2379)

Your plan is structured so that you stay when your position is working and you get out when it’s not. (Location 2381)

which. Doing the “wrong thing” (i.e., breaking your rules) in the markets and still being rewarded means you will repeat behavior that may or may not have been responsible for the profitable trade or investment. (Location 2412)

Any deviation from your plan triggers the potential for losses due to psychological factors. (Location 2423)