What I Learned Losing a Million Dollars Book Summary

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What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan

My Thoughts

There is a lot to like about this book. It has good storytelling and gives a broad overview of various types of investing and investing philosophies. The overarching theme is learning not to lose money, and having a written plan in place before investing.

My Favorite Quotes

  • Success can be built upon repeated failures when the failures are not taken personally.
  • Studying how not to lose money can be more important than studying how to make money.
  • The most successful investors have one thing in common, not losing money.
  • Failure to have and follow a plan is the root cause of reasons for losing in the market.
  • You must plan before entering the market.

Part One: Reminiscences of a Trader

All successful investors have one thing in common. They understand that losing is part of the game.

Success can be built upon repeated failures when the failures are not taken personally.

Failure can be built upon repeated successes if the successes are not taken personally.

Edison failed 10,000 times.

Studying how not to lose money can be more important than studying how to make money.

Experience is the worst teacher. It gives the test before teaching the lesson.

Success can obsolete the behavior that causes it.

Smart people learn from their mistakes. Wise people learn from other people’s mistakes.

Part Two: Lessons Learned

There are many different ways to make money in the market. The most successful investors have one thing in common, not losing money. The author decided to study how not to lose money in the market.

Characteristics of people who lose money in the markets.

  1. Mental Processes
  2. Behavioral Characteristics
  3. Emotions

Mental Processes:

Behavioral Characteristics
Five types of participants in the market:

  1. Investors
  2. Traders
  3. Speculators
  4. Bettors
  5. Gamblers

Chapter 6: Psychological Dynamics of Loss

Loss is not failure.
It is not correct to treat all losses as a failure.
The words loss, wrong, bad, and failure are often regarded as the same. So are win, right, good, and success.

Profit and loss are not the same as win and lose.

If you lose at sports it is because you were defeated, not necessarily because you lost.

External vs Internal Losses

All losses can be categorized as either 1) Internal or 2) external.

Internal: self-control, esteem, love, your mind.
External: a bet, game or contest, money.

External losses are objective.
Internal losses are subjective.

Know the difference between facts and opinions.

5 Stages of Internal Loss

  1. Denial
  2. Anger
  3. Bargaining
  4. Depression
  5. Acceptance

Discrete Events vs Continuous Processes
Loss by your favorite sports team for example.
The author made the mistake of even personalizing someone else’s losses.

Chapter 7: The Psychological Fallacies of Risk

Most people who think they are investing are speculating and most people who think they are speculating are gambling.

5 Activities That Determine Inherent vs Created Risk

  1. Investing is parting with capital, an intention to be separated from your capital for an extended time. Investing is usually associated with a long time horizon.
  2. Trading is market-making. Trying to stay net flat and make money by extracting the spread. Like a bookie. Often associated with futures.
  3. Speculating is buying for resale rather than for use or income. Parting with capital in the expectation of capital appreciation. Not interested in dividends.
  4. Betting is an agreement between two parties where to party proved wrong about the outcome will forfeit. Betting is about being right or wrong.
  5. Gambling is a derivative of betting. It usually involves a game or event of chance. It can involve skill and chance. A form of entertainment.

Betting is to be right, gambling is for entertainment and excitement. A professional gambler could be a speculator.

Psychological fallacies most people have about risk and probability:

  1. Overvalue wagers with a low probability of a high gain and undervalue wagers involving a relatively high probability of low gain. Favorites and long shots at race tracks.
  2. A tendency to interpret the probability of successive independent events as additive rather than multiplicative.
  3. A belief that after a run of successes a failure is mathematically inevitable and vice versa. Known as the Monte Carlo fallacy. Fact: Every throw in craps is independent of all others.
  4. The perception that the psychological probability of the occurrence of an event exceeds the mathematical probability of the event is favorable and vice versa.
  5. A 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. They remember the streaks more.
  6. A tendency to confuse the occurrence of unusual events with the occurrence of low probability events.

Money odds vs probability odds.
Some dollars are bigger than others (seems that way).

Chapter 8: the Psychological Crowd

Emotions vs the Crowd
Emotions are often cited as the biggest reason for stock market losses.

Conventional views of the crowd:

  1. Runaway markets. 1637 tulip frenzy in Holland.
  2. Contrarian Approach (try to take a market position opposite the crowd)

Two common models when a market is driven by a crowd:

Model 1:

  1. Displacement
  2. Opportunities
  3. Credit expansion
  4. Euphoria

Model 2:

  1. Speculation
  2. Credit expansion
  3. Financial distress
  4. Crises
  5. Panic and crash

The crowd acts on feelings, emotions, and impulses.

The individual acts after reasoning, deliberation, and analysis.

Three main characteristics that describe the mental state of an individual forming part of a crowd:

  1. A sentiment of invincible power
  2. Contagion
  3. Suggestibility (like being hypnotized)

Two Psychological crowd models:
Delusion Model (before having a position in the market)

  1. Expectant attention
  2. Suggestion made
  3. Process of contagion
  4. Acceptance by all present

Illusion model (after having a position in the market)

  1. Affirmation
  2. Repetition
  3. Prestige
  4. Contagion (ends only when you are forced out by external forces)

Markets exist to satisfy wants or needs. People make purchases for only these two reasons, something they want or need.

Hope Fear Paradox
Ailments of hope and fear.
Don’t buy, sell, or trade based on hope or fear.
You can often experience hope and fear simultaneously.
Mania and panic occur when hope and fear meet the crowd.
Herd instinct.

Summary up to this point in the book:

People lose because of psychological factors, not analytical ones. (Chapter 5)
They personalize the market and their positions. (Chapters 1-4)
Internalizing what should be external losses. (Chapter 6)
Confusing the different types of Risk activities. (Chapter 7)
Making crowd trades. (Chapter 8)

Is there a single common factor?

Part 3: Tying it all together

Chapter 9: Rules, Tools, and Fools

The common factor is uncertainty.
We need a way to deal with the uncertainty.

Three choices when dealing with the uncertainty of the future:

  1. Engineering
  2. Gambling
  3. Speculating

The decision-making process is as follows:

  1. Decide what type of participant you are going to be.
  2. Select a method of analysis.
  3. Develop rules.
  4. Establish controls.
  5. Formulate a plan.

Ingredients of your plan should be:

  1. Entry
  2. Stop Loss
  3. Price objective

Determine stop loss first.
Scenario planning.

Failure to have and follow a plan is the root cause of reasons for losing in the market.

Your timing will never be perfect.
A plan keeps you objective.

You must plan before entering the market.
Commit the plan to paper.
Look at Morgan Stanley’s reports for a good example of planning.

My Action Steps After Reading

  • Created an investing plan as described in chapter 9.
  • Read other books on finance and investing.

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Hope you enjoyed this and got value from my notes.
This is the 31st book read in my 2017 reading list.
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