What I learned losing a million dollars

WHY A BOOK ON LOSING?

Almost without exception, anyone who has participated in markets has made some money. Apparently people have at least some knowledge about making money in the markets. However, since most people have lost more money than they have made, it is equally apparent that they lack knowledge about not losing money. When they do lose, they buy books and attend seminars in search of a new method of how to make money since that last method was "obviously defective." They are like racing fans making the same losing bet on an instant replay. Investors' book shelves are filled with Horatio Alger stories of rags to riches millionaires. Sometimes these books are read solely for entertainment, but more often than not they are read in an attempt to learn the secret of how the millionaires made their fortunes, particularly when those millions were made by trading in the markets. Most of these books are of the "how-to" genre, from James Brisbin's 1881 classic The Beef Bonanza: How To Get Rich On The Plains to modern day versions of how to get rich in the market: How to win in the market..., How to use what you already know to make..., How to apply the winning strategies..., How to make a million dollars in the market before breakfast. We've all read them, but if the "how-to" books were that beneficial we'd all be rich.

A review of the investment and trading literature reveals very little written about losing money. When something has been written on this topic, it's usually a sensationalistic unauthorized tell-all biography or tabloid-like expose' which panders to people who delight in the misfortune of others. Personality journalism books are definitely read for entertainment, not as an attempt to learn from the subject's mistakes. Losing has received only superficial coverage in most books on the markets; they raise the subject, stress its importance and then leave it dangling.

What I Learned Losing A Million Dollars is a light treatise on the psychology of losing and is intended for investors, speculators, traders, brokers and money managers who have either lost money or would like to protect against losing what they've made. Most discussions of the psychological aspects of the markets focus on behavioral psychology or psychoanalysis (i.e., sublimation, regression, suppression, anger, self punishment). This isn't to say such books aren't instructive, it's just that most people find it hard to digest and apply the information presented in those books. Other books use hypothetical character sketches to make their points while others simply compile a list of old saws about losses. This book, on the other hand, entertains and educates you on the psychology of market losses in layman's terms, anecdotally, through the story of a trader who actually lost over a million dollars in the market.

The first part of the book is Jim Paul's personal odyssey of an unbroken string of successes which took him from dirt poor country boy to jet-setting-millionaire and member of The Executive Committee at the Chicago Mercantile Exchange, before a devastating $1.6 million loss brought him crashing down. One of the premises of this book is that the rise sets up the fall; the winning sets up the losing. You can't really be set up for disaster without having it preceded by success. If you go into a situation in a neutral position having neither successes nor failures beforehand, you acknowledge that your odds are maybe fifty-fifty; you may have a winner, you may have loser. But if you start from scratch and have a run of successes, you are setting yourself up for the coming failure, because the successes lead to a variety of psychological distortions. This is particularly true if you have unknowingly broken the rules of the game and won anyway. Once that happens to you, you think that you are somehow special and exempt from following the rules.

The seeds of Jim's disaster were sown with his first job at the age of nine. His exposure to the outside world, money, and material things was the foundation for his career's sharp and quick ascent as well as its ultimate collapse. Repeated attempts to make the money back by speculating in the markets ended in failure and left Jim disillusioned. He set out on a quest to find out how the pros made money in the markets so he could follow their example. When you're sick you want to consult the best doctors, when you're in trouble you want the best lawyers, so Jim read all about the techniques of the professionals to learn their secret of making money. But this search left him even more disillusioned since he discovered that the masters not only made money in widely varying ways, but also in ways that contradicted each other. What one market pro advocated, another ardently opposed. It finally occurred to him that studying losses, losing and how not to lose was more important than studying how to make money.

The second part of the book presents the lessons Jim learned from his losing experience. Namely, there are as many ways to make money in the markets as there are people participating in the markets, but there are relatively few ways to lose money in the markets. People lose money in the markets either because of errors in their analysis or because of psychological factors which prevent the application of the analysis. Most of the losses are due to the latter. All analytical methods have some validity and make allowances for the times when they won't work. But psychological factors can keep you in a losing position and also cause you to abandon one method for another when the first one produces a losing position.

The third part of the book shows you how to avoid the losses due to psychological factors. Trading and investment mistakes are well known and easily understood but difficult to correct. What you need is not a long litany of complex psychological theories but a simple framework to help you understand, accept, and thereby avoid catastrophic losses. This book will help you recognize, identify, and avoid the pitfalls of investing, trading, and speculating.

So, why a book on losing? Because, there are as many ways to make money in the markets as there are participants but relatively few ways to lose, and despite all the books on how to make money in the markets, most of us aren't rich!