The Reading Room

What I Learned Losing a Million Dollars

Jim Paul and Brendan Moynihan

Published: 2013, Columbia Business School Publishing

This book is a candid recollection and analysis of Jim Paul’s real-life story of not only making a million dollars but losing that fortune, and the psychological factors that ultimately led him to that situation.

The essence of the book can be summarised as “Success can be built upon repeated failures when the failures aren’t taken personally; likewise, failure can be built upon repeated successes when the successes are taken personally.” The core philosophy behind this is that emotions have as big a role to play in the success or failure of the task at hand, as much as technical skill or even luck. And the intent with which the task is done is the distinguishing factor e.g., all card playing is not gambling and all stock purchases are not investments.

The first part of the book sets the scene where a young Jim Paul becomes convinced through various life experiences that a) it is not important what you do for a living but rather what you get paid for doing it and b) knowing the right people to get the job done will get it done. An unbroken string of successes leads to Jim Paul’s rapid rise from a “dirt poor country boy” to a commodities trader, to the board of the Chicago Mercantile Exchange and ultimately to be a self-made millionaire.

From making more than a quarter of a million dollars in one day to losing over a million in a span of a few days starts Jim Paul’s search for answers on how to make money. Initially, he struggles to reconcile the learnings he finds – “Diversify your investments” says John Templeton, “Concentrate your investments” says Warren Buffet. The second part of the book, thus, is a quest to search for answers on how not to lose money rather than on how to make money. A summary of some of the key learnings from this evaluation of mental processes, behavioural characteristics and psychological factors and the role of emotions in decision making is summarised below:

  1. It is important to distinguish between internal loss (such as love or self-control, which are linked to an individual and totally subjective) and external loss (such as a game, contest or money, which are objective and not open to individual interpretation). For example market profits or losses are external, objective events but can become subjective if they are internalised by attaching emotions like self-esteem or ego.
  2.  Once a loss is internalised, the stages one experiences are very similar to those of losing a loved one or facing death i.e. denial, anger, bargaining, depression and acceptance.
  3. Losses from continuous events (where the participant makes and re-makes the decisions as there is no end point) are more susceptible to being internalised than discrete events (an activity with a defined ending point). Investing in markets is a continuous process and hence, despite a loss in the market by itself being external, it is the uncertainty of the future that can trigger the five stages of loss once the loss has been internalised.
  4. “Most people who think they are investing are speculating. And most people who think they are speculating are gambling.” The distinguishing factor being that gambling creates risk while investing/speculating assumes and manages risks that already exist or could exist. What determines whether a person is investing, trading, speculating, betting, or gambling is the characteristics a person displays when engaging in the activity. Therefore, a professional gambler (whose intent is to make money and not to seek entertainment) is similar to a stock arbitrageur as they both deal with calculated risks. Activities like betting and gambling are suitable for discrete events but if they are applied to a continuous process (like investing in the markets) it can leave you open to enormous losses.
  5. The authors also touch upon a number of psychological fallacies that people display when it comes to risk and probability including the Monte Carlo Fallacy, tendency to overvalue/undervalue wagers depending on the probability and the size, as well as confusing unusual events with low-probability events.

In essence, the authors narrow down on “emotionalism” i.e., decision making based on emotions as the most common reason for losses in the markets and what leads to herd instinct and becoming part of a psychological crowd. The authors summarise the mental state of someone in a crowd as having a feeling of invincible power, being almost hypnotised and thus highly suggestible in that state.

The last part of the book was the most enriching and full of analogies that can be applied not just to investing but to daily life. This part talks about having a simple framework, a plan, to avoid losses due to psychological factors. We often talk about having a target price for a stock we own. On exactly similar lines, the authors stress that before one enters the market, it is essential to know where (price), when (time) and why (new information) the position will have to be exited. Having a clear plan which first determines a stop loss, converts a continuous process into a discrete event, thereby maintaining objectivity once you are in the market. The authors also link this to Ayn Rand’s “Objectivism” philosophy which is to refrain from answering (or having an opinion) until you can think on the subject, nicely summarised by the authors as “think before you answer, if you even answer”. It is essential here to highlight that the authors stress the need for not just having a mental plan but to actually commit that plan to paper, similar to the Morgan Stanley example where the worst-case scenarios are written down in books called “blue books”.

Perhaps one of the most philosophical takeaways that I drew from the book was when the authors concluded by talking about a lockjaw poker player’s strategy i.e., one who never stays in the game unless they have a hand. This all boils down to having a structured plan and staying in the game only when the position is working for you, and thus, taking the loss and not worrying about it when it is not. And the importance of understanding the distinction between “perseverance because you think the idea is a good one, and perseverance because you think the idea is a good one.”

 

Swati Jain
November 2022

The information contained above and in other entries in the Ocean Dial Book Review Series is intended for general information and entertainment purposes only, and should not be relied upon in making, or refraining from making, any investment decisions. No information provided herein should or can be taken to constitute any form of advice or recommendation as to the merits of any investment decision. You should take independent advice from a suitably qualified investment adviser before making any investment decisions.

Leave a Reply

Your email address will not be published. Required fields are marked *

Chums: How a Tiny Caste of Oxford Tories Took Over the UK

Simon Kuper

Published: Published: 2022, Profile Books

The lack of academic effort generally put in by Oxford undergraduates is an important theme running through this book, penned by Financial Times columnist Kuper. It links this work-shy attitude to the centuries’ old dominance of Oxford by the top English public schools spawning “top tory toffs with a born to rule attitude”.

Read more

The Outsiders

William M. Thorndike Jr

Published: 2012, Harvard Business Review Press

The Outsiders chronicles the unconventional techniques that led eight CEOs to outperform the S&P 500 by an astounding twenty times.

Read more

Shackleton’s Boat Journey

F.A. Worsley

Published: 1933, Philip Allan & Co. Ltd

On August 1, 1914, on the eve of World War I, Sir Ernest Shackleton and his hand-picked crew embarked in HMS Endurance from London’s West India Dock, for an expedition to the Antarctic. It was to turn into one of the most breathtaking survival stories of all time.

Read more

Disclaimer

IT IS IMPORTANT THAT YOU READ THE CONTENTS OF THIS NOTICE CAREFULLY BEFORE ACCESSING THIS WEBSITE. THIS NOTICE GOVERNS YOUR ACCESS TO AND USE OF THE WEBSITE. BY ACCESSING THE WEBSITE YOU AGREE TO ACCEPT THE TERMS OF THIS NOTICE AND THE FOLLOWING TERMS OF USE. IF YOU DO NOT AGREE TO ABIDE BY THESE, YOU MUST STOP USING THIS WEBSITE IMMEDIATELY.

This website is provided by Ocean Dial Asset Management Limited, whose Registered Office is at 13/14 Buckingham Street, London WC2N 6DF and Registered Number 05583807. Ocean Dial Asset Management Limited is authorised and regulated by the Financial Conduct Authority (“the FCA”), with registered number 447424.

NOT FOR U.S. PERSONS
The information contained herein does not constitute a distribution, an offer to sell or the solicitation of an offer to buy any securities in any jurisdiction in which such distribution or offer is not authorised. In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America or to or for the benefit of any U.S. Person as such term is defined under the United States Securities Act of 1933, as amended.

No investments or services mentioned on this website are directed at U.S. Persons who are not Professional Clients or Eligible Counterparties as defined by the UK Financial Conduct Authority (FCA) Handbook or Qualified Purchasers as defined under the Investment Company Act of 1940. The information contained herein does not constitute a distribution, an offer to sell or the solicitation of an offer to buy any securities in any jurisdiction in which such distribution or offer is not authorised.

THIS WEBSITE IS ONLY MADE AVAILABLE TO PROFESSIONAL CLIENTS AND ELIGIBLE INVESTORS AND COUNTERPARTIES.

ODAM does not manage money for retail clients. Eligible investors only may access ODAM’s expertise through the funds or investment companies for which it acts as investment manager.

This website is not directed at you if Ocean Dial Asset Management Limited (“ODAM”) is prohibited by any law of any jurisdiction from making the information on this site available to you, and is not intended for any use which would be contrary to local law or regulation. This website and its contents are not intended to sell services or products over the Internet, rather for Internet viewer convenience and information purposes.

Information displayed in this website contains material that may be interpreted by the relevant authorities in the country from where you are viewing the website as investment advertising or an offer to purchase securities. Accordingly the information on this website is only intended to be viewed by the persons who fall outside the scope of any law that seeks to regulate investment advertising in the country of your residence or in the country in which the website is being viewed. Users of this website are therefore assumed to have the knowledge and experience in business and financial matters to enable them to evaluate the merits of, and risks of, investing in the investment funds referred to in this website. Persons of any other description should not enter this website nor rely on any of the information contained therein. If you are uncertain about your position under the laws of the country in which the website is being viewed then you should seek clarification by obtaining legal advice from a lawyer practising in the country of your residence or in the country in which the website is being viewed before completing this question.

Risk warnings

Investments may fall as well as rise and investors may lose a substantial portion or even all of their investment. Past performance is not necessarily a guide to future performance.

Investments denominated in foreign currencies can result in the risk of loss from currency movements as well as movements in the value, price or income derived from the investments themselves.

Investment in emerging markets involves risks which may not be typically associated with investing in more developed markets. Investment in small- and mid-cap stocks may also involve a higher degree of risk as these markets tend to be more volatile than their larger capitalisation counterparts.

Disclaimer

To the extent permitted by relevant law and regulation, ODAM expressly disclaims any and all liability which may derive from this website or any other information provided by ODAM in connection with this website, and any errors therein or omissions therefrom. The description of the investment management services and processes provided by ODAM in this website is written in general terms. The services and investment funds referred to in this website should not be regarded as an offer nor solicitation for such services or investment funds in any jurisdiction where such offer or solicitation is unlawful. The terms and conditions applicable to individual investors investing in investment funds managed by ODAM are set out in each relevant fund’s offering document. This website contains information designed only to provide background material for determining whether or not to consider investment. This website should be read in conjunction with the relevant offering document for each fund. All potential investors must carefully read the offering document which will contain significant additional information needed to evaluate investment in the fund and important disclosures regarding risks, fees and expenses. The offering document is the sole document upon which potential investors should rely. Recipients in any doubt about the content of this website should seek advice from an independent professional adviser.

This website is based upon information that is considered to be reliable but ODAM does not represent or warrant that it is accurate or complete, nor should it be relied upon as such. Views and opinions expressed within this website including comments on sectors or individual stocks or companies are those of ODAM and its Mumbai based affiliated company Ocean Dial Asset Management India Private Limited (a company incorporated in the Republic of India) as at the date of publication. Subsequent events may cause these views to change. The investment policies and procedures described are guidelines and not rules. Occasional deviation from the parameters given may result.

Use of links
The ODAM website may contain links to websites operated by other parties. ODAM does not control the content or accuracy of information on such websites and does not in any way confirm or endorse the material placed on such sites. The links are provided for your reference only.

Copyright
The copyright and all other rights in all of the material on this website are owned by the company listed on the web page or the material is included with the permission of the rights owner. You may review and copy material on this website for your own private or domestic use only. All other copying or use is prohibited.

Governing law
You agree that in the event of any dispute of any nature that may arise between you and ODAM, these terms and conditions shall be governed by and construed exclusively in accordance with the law of England and Wales and you agree to be subject to the exclusive jurisdiction of the courts of England and Wales.

Privacy policy
Any personal information that you supply ODAM via the website and other means will be held in accordance with the General Data Protection Regulation – please see our privacy notice for more details . If you would like to be removed from our database at any point, please email your request to enquiries@oceandial.com

Use of cookies
For the purposes of gathering data to measure traffic and patterns of usage on our website, we need to use your IP-address. In addition, for example, we use cookies to ascertain as to whether you have agreed to our disclaimer.
A cookie is a small file held on your PC. If you do not want to accept cookies, you will need to alter the setting on your internet browser. We will not use your IP-address or any cookie to identify you personally.