What I learned losing $1M

About the book

Book author: Jim Paul

The book is a “rise and fall, and lessons learned” - kind of biography by Jim Paul, a trader. We follow his early life, where he built up a lot of confidence from cheating the rules and winning a lot. He thought he was better and different from everybody else. He got into trading and did very well. The increased confidence caused him to not know how to fail and take a loss. We follow him through his downfall and how that taught him a lot of necessary lessons.

Character, like a photograph, is developed in darkness.

I think it is healthy to study failures along with successes.

Reflection and takeaways

I read this on my Kobo. All in all, I would summarize it as a rare lesson in “how to not lose money” rather than “how to make money”. Here are my favourite highlights.

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 and card receipt. It’s like playing roulette without knowing in advance how much you had bet and only after the wheel had stopped letting the croupier tell you how much you lost or won. If you wouldn’t do that in a restaurant or in a casino, why would you do it in the market that has so many more variables and so much more money involved?

Unfortunately, most people do not invest with any sort of system or plan. That turns you into food for the smart money.

One of the oldest rules of trading is: If a market is hit with very bullish new and instead of going up, the market goes down, get out if you’re long. An unexpected and opposite reaction means that there is something seriously wrong with the position. Two consecutive limit down days following the release of a supposedly bullish government report does not indicate a strong market.

This is very true - remember the market is always right, because it sets the price.

Friday morning, I got up, went straight to the quote machine, and sat on the edge of my seat moments before the market opened, saying, “Come on guys, open this sucker. Let’s get going. I want to make some money.” I literally assumed I was going to make more money. The question was not wheter I was going to make money. It was how much money I was going to make. There was a total presumtion of success; what had gone before would continue.

This is really what can happen when you gamble more than you invest or trade. This was before Jim got served some humble pie.

If I had been able to stay in the market a little longer, by May 1984 my 540 spreads would have been worth £3,200,00. In hindsight, however, I don’t think it would have made any difference. Sooner or later I was going to loose all my money, and the later it was, the more I was going to lose. If I had ridden through that valley of death and come out the other side with $3,200,000, somewhere along the ride, in some other trade, I would have ended up losing $6,000,000 instead of $1,600,000. It would just have postponed the inevitable loss and made it bigger.

I’m also happy about my losses, failures and lessons. The earlier they happen to me, the more grateful I am. Naivety gets forcibly chiseled away from you. It’s not pleasant, but it’s part of it.

For example, what’s an investment to most people who dabble in the stock market? Ninety percent of the time an “investment” is a “trade” that didn’t work. People start with the idea of making money in a relatively short amount of time, but when they start losing money they lengthen the time frame horizon and suddenly the trade becomes an investment. “I really think you ought to buy XYZ here Jim, It’s trading at $20, and it’s going to $30”. We buy and it goes down to $15. “It’s a really good deal here at $15. It’s gonna be fine”. So we buy more. Then it goes to $10. “Okay, we’re taking the long term view. That’s an investment”.

This is a very healthy take. I see it all the time, and I’m guilty of it myself. I still have one poor trade that I now classify as an investment in my portfolio. It’s down 32% and a sore sight. I didn’t have a good exit strategy planned.

Don’t worry about the ones you miss; they were someone elses. Your rules will only enable you to participate in some of the millions of possible opportunities, not all of them.

This goes along well with the next one:

A fool must now and then be right by chance.

I think a lot about this with Bitcoin. One side of me is a little sad that I sold my BTC very early. I didn’t trade with a system, and got risk averse. I do get a little pissed off when people who sold all their shit to go all in on Bitcoin are now regarded as investment ‘geniuses’. This is not copium from me. 99.99% of the time that does not work out the way you hope it will. You’re left broke and noone is calling you a genius!

According to Drucker, “control follows strategy”. So in terms of a business plan, market selection and entry criteria constitute controls. Drucker’s observation means that the controls should be consistent with the strategy, not that they should be selected after the strategy is implemented. Unfortunately, most market participants pick their stop after they decide to enter the market and some never put in a stop at all. You must pick the loss side first. Why? Otherwise, after you enter the market, everything you look at and hear will be skewed in favor of your position. For example, if someone has a long position and you ask him what he thinks about the market, is he going to tell you all the reasons why it should go down? Of course not.

I like this perspective along with the next highlight:

Another reason controls should precede strategy is that, as we learned in chapter 7, you can’t calculate the probability of a trade being profitable; you can easily calculate your exposure. So all you can do is manage your losses, not predict profits.

Just control the downside, then you can see how right your thesis is. Size your bet depending on how strong your system is and how comfortable you are.

Another way of looking at it is: are you long because you are bullish, or bullish because you are long? If you’re bullish because you’re long, your decision was inductive and you will look for reasons, other people’s opinions, or anything to keep you in the position - anything from looking stupid or admitting you are wrong. Invariably, you will find what you are looking for to justify staying in a losing position, and the losses will mount. In his book “Teaching Thinking”, internationally renowned education expert Edward de Bono says “A person will use his thinking to keep himself right. This is especially true with more able pupils whose ego has been built up over the years on the basis that they are brighter than other pupils. Thinking is no longer used as an exploration of the subject area but as an ego support device.” That sounds exactly like me. My ego had been built up over the years because the events seemed to indicate I was a little better than other people.

Jim really flew too close to the sun

The only way to combat the opinion trap is to follow Rand’s lead: think before you answer - if you even answer. If someone asks you what you think about the market, avoid personalizing the market by answering something along the lines of “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 do the other.” This response expresses your deductive thinking in the form of an objective plan rather than inductive thinking in the form of a subjective opinion. The response is also consistent with viewing the market objectively instead of subjectively, which would lead to personalizing your successes and profits as well as your failures and losses. Answering in the manner just described is not an attempt to absolve you of responsibility for your actions.

Why did I pick it

Nassim Taleb recommended it.

Verdict

3.5 /5. Some good advice from a person who has been very humbled.