Book Reports · Finance · Professional Development

How to Lose a Million Dollars

This post is about Jim Paul’s book “What I Learned Losing a Million Dollars,” which I believe is one of the books in the Tim Ferriss book club. I found the first half of the book pretty unpleasant, reading about the egotistical protagonist. The second half is worthwhile, but I think only if you’re actively trading/investing in markets. For any kind of trader, I would consider this book required reading. I also found the writing problematic at times (as you’ll see below), and a lot of lingo unexplained. Some points that stuck out to me:

  1. p. vii: “This potential for temporary success by pure luck beguiles people into thinking that trading is a lot easier than it is. The potential for even temporary success doesn’t exist in any other profession.”
  2. p. 3: “Personalizing successes sets people up for disastrous failure. They begin to treat the success as a personal reflection rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky.”
  3. p. 47: “One of the oldest rules of trading is: If a market is hit with very bullish news and instead of going up, the market goes down, get out if you’re long. An unexpected and opposite reaction means there is something seriously wrong with the position.”
  4. p. 63: “I had to find out how the pros made money in the markets. I had to learn the secret that all of them must know. But if the pros couldn’t agree on how to make money, how was I going to learn their secret? And then it began to occur to me: there was no secret. They didn’t all do the same thing to make money.”
  5. p. 76: “…in the markets losses should be viewed like the light bulbs or rotten fruit mentioned earlier: part of the business and taken with equanimity.”
  6. p. 89: “Let’s define what those five activities are and the characteristic associated with each.
    1. 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…
    2. Trading is basically an activity in which someone (usually called a dealer) makes a market in a given financial instrument. Traders try to extract the bid-ask spread from a market..
    3. Speculating in its simplest form is buying for resale rather than for use or income as is the case for commodities or financial instruments, respectively. Speculating is parting with capital in the expectation of capital appreciation…
    4. Betting is an agreement between two parties where the party proved wrong about the outcome of an uncertain event will forfeit a stipulated thing or sum to the other party…
    5. Gambling is a derivative of betting. To gamble is to wager money on the outcome of a game, contest, or event or to play a game of chance for money or stakes…”
  7. p. 94: “Betting and gambling are suitable for discrete events but not for continuous processes [like the stock market]. If you introduce the behavioral characteristics of betting or gambling into a continuous process, you are leaving yourself open to enormous losses.”
  8. p. 94: “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 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…
    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…
    4. Fourth is the perception that the psychological probability of the occurrence of an event exceed the mathematical probability if the event is favorable and vice versa…
    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…” WHAT?!
    6. Sixth is people’s tendency to confuse the occurrence of ‘usual’ events with the occurrence of low-probability events…”
  9. p. 103: “Looking a such historical speculative episodes in search of common patterns has produced various models that describe the stages of the process at work when a market is driven by a crowd. For instance, in Manias, Panics, and Crashes by Charles P. Kindleberger we find the Minsky Model: (1) Displacement – some exogenous event (war, crop failure, etc.) shock 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.”
  10. p. 105: “The basic distinction  between the individual and the crowd is that the individual acts after reasoning, deliberation, and analysis; a crown acts on feeling, emotion, and impulses.”
  11. p. 106: “The responsibility that keeps individuals in control vanishes in the crowd.”
  12. p. 111: “…hope and fear are the primary emotions; greed is simply hope run amok.”
  13. p. 112: “…man is extremely uncomfortable with uncertainty, tries to substitute certainty for uncertainty, and, in doing so, succumbs to the herd instinct.”
  14. p. 119: “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 problems.”
  15. p. 119: “Successful investing is the result of successful speculation.”
  16. p. 121: “…the decision-making process is as follows: (1) Decide what type of participant you’re going to be, (2) select a method of analysis, (3) develop rules, (4) establish controls, and (5) formulate a plan.”

What’s your take?

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