What I Learned Losing A Million Dollars
by Jim Paul and Brendan Moynihan
($1.5 million, actually)
If you've read Nassim Taleb's Fooled by Randomness (or others), then you've heard the stories of young traders who weren't even alive during previous market crashes who make soaring fortunes, convince themselves of their own greatness, live the high life, then come crashing down when suddenly the market turns and they're left broke and unemployed after realizing markets don't always go up. Most of those traders don't write books, but fortunately Jim Paul did (and he's older than my dad).
This book was on Tim Ferriss' recommended list and I've heard several people cite what it taught them, and given that Paul was a Kentuckian I was interested to read the tale. It's a quick read and mostly interesting. If you've already read quite a bit of Taleb, Kahneman, Arielly, or other behavioral economists then you might not glean much insight into human behavior. But the vast majority of people I've met in the finance industry have not read those authors and suffer from the same hubris.
The book is summed up in the beginning, but here's the book in a paragraph:
It is a study of losing in order to win; success too often sets the stage for failure. The key lesson is not to personalize success or failure. Every business book written by traders with recipes for success contains contradictions. Following one "successful" strategy will put you at odds with someone else's "successful" strategy. Just because a person appears successful (or not) does not mean that he is, he was most likely lucky (even if convinced otherwise). People don't write books about the unlucky. One way to get an edge in life is to study the rules and use them to your advantage. If you're a trader, use a hard rule to cut your losses and walk away. First, decide what kind of market you are going to participate in, then decide what kind of market analysis you are going to use, and then what your maximum acceptable loss is. Be disciplined not to deviate from your rules. If someone asks you "are you in, or will you stay stupid?" simply explain that person's trade may be successful but it's not part of your own strategy. Understand that losses are objective, they will happen, and they're not your fault. But not minimizing those losses by walking away "when it becomes painful" is your fault, and that's what Paul stresses.
Paul grew up in Elsmere, KY not far from Cincinnati. Even as a nine year old in the 1950s he had to work to pay for his Catholic school tuition and books. He enrolled at the University of Kentucky in 1961 and essentially invited himself into a fraternity, then hustled someone at cards to avoid hazing. He was not a model student but did well enough in business and economics because he understood it intuitively, although he was horrible at math. He grew up working at a country club and it seems his dad knew some people, eventually he joints the Army and gets into OCS via a Congressman's phone call. At OCS he finally buckles down to obey the rules and give his best effort, graduating at the top of his class. He gets to miss Vietnam, which is a bonus.
He gets an MBA from Xavier which helps him broaden his network. He struggled with the math-intensive courses in the MBA program, and gives encouragement to anyone with a weakness: learn from the division of labor. "If you can't do something pay someone who can and don't worry about it." He gets on with a firm that offers him a job trading and learning from other more powerful brokers, basically by reading the book related to their psychological evaluation so he knows how to get a perfect score. (Find the rules and use them.) By 1969, he keeps getting the idea that he is "better" than everyone due to his ability to climb. He turns down a low offer with a big NYC trader and ends up doing better in Cincinnati.
When fired, he moves to Cleveland and a small firm entering the commodity markets, booming after Nixon closes the "gold window" in 1971. He sets up shop on the Chicago Board of Trade using "LUCK" as his name tag in order to get noticed and remembered. He quickly gets elected to be part of the Board of Governors, making him privy to the inner circle that runs the exchange, easily making $200-300 annually. But he admits that the "vast majority" of his wins were "lucky," he had no idea why he was making money. When the market for timber tanks, he is fired and is taken off the Chicago Board. This leads to a time of depression and a near suicide attempt. It's here he decides to learn rather than change careers.
He studies books by all the legendary traders and self-made millionaires, finding most of their trading strategies contradictory and therefore unhelpful. He then begins to pay attention to what they say about losses, and realizes it's better to control your losses than worry about wins. Paul's mom sadly commits suicide over his dad's debilitating illness before learning of the loss of his Chicago job, but that event also helps put loss and depression in perspective.
He learns not to internalize external losses. Market losses are objective and only God knows what markets will do. But Paul was taking everything personally, including losses with his client's money, that they put up knowing there was risk. Markets don't always go up, just like Kentucky doesn't win every basketball game. Betting on Kentucky to win and taking it personally when they lost was dumb. He reads On Death and Dying and describes the five stages of grief as similar to what irrational traders feel. He basically discovers the myth of the hot-hand and the false runs that fool traders and Vegas gamblers.
Paul notes the crowd/herd mentality. While the Buffetts of the world may claim to make money by moving against the crowd, this is not always the case. More often, if everyone else is headed for the exits that's a sign you should too. When it becomes "painful," get out. The crowd removes inhibition, people do more and risk more when in a crowd due to its anonymity.
Decide what kind of market participant you are going to be, what kind of market analysis you are going to use, and what your stop-loss rule will be before you enter any market. Peter Drucker reminds us that "There is no perfect decision." People who ask why the market is up or down usually want to justify their own trading positions, they're either arguing with the market as to its wisdom or figuring out when the timing will work in their favor-- both are silly. LBJ did not have an exit strategy or stop-loss limit in Vietnam, like a trader who just throws bad money after good down the rabbit hole. When someone asks you what the market is going to do answer according to the method that you use to invest, or your model, not according to your subjective opinion (working in an economic forecasting office, I agree). Write your plan down and stick with it. When you feel pain, stop.
Ultimately, your life's value is not determined by what you have accomplished but how you have accomplished, your self-worth should not be a reflection of events outside of your control.
The audio version ends with Paul being interviewed by Tim Ferriss, and their discussing Nassim Taleb's praise for this book.
I enjoyed it, I give it 4 stars out of 5. I recommend it to anyone involved in finance or managers who struggle with personalizing success/losses in their projects.