Next on my to-read list is Jim Paul and Brendan Moynihan's book, What I Learned Losing a Million Dollars. It is the story of one trader's (Jim Paul) disastrous losing streak and how he (barely) survived it, learning a few key lessons on ego and risk in the process.
As you'll note from the book's rather unusual title, What I Learned Losing a Million Dollars is not your typical "trading system-in-a-book", promising a golden pathway to riches. It deals squarely with losses and how overconfidence and success can lead us to complacency and ruin. So what lessons can we take from another trader's experience losing large sums of money?
Tim Ferris recently interviewed the book's co-author, Brendan Moynihan. Here are some highlights from their discussion:
• While introducing Brendan Moynihan, Tim mentions that he was won over by Nassim Taleb's recommendation of the book, which he praised for its "non-charlatanic" real-life wisdom. Moynihan says that the interest generated from Taleb's endorsement spurred them to reprint the book.
• Moynihan met globetrotting investor, Jim Rogers in Alabama. He learned a bit about finance from Rogers and decided he wanted to get involved with the markets. While working in Chicago, Moynihan met futures trader, Jim Paul and heard the story of his near-washout. He later flew to his home in Chicago to record Paul and transcribe his story into a book. Some amusing stories about Paul and self-publishing in the pre-internet age are included.
• When we lose money, we tend to internalize what should be an external loss. People often equate net worth with self-worth, a fatal mistake.
• There are (according to Moynihan) 5 types of market participants: investors, speculators, traders, bettors, and gamblers. How you behave in the market environment defines you in terms of each class of participant. "You don't have to be in a casino to gamble. You can gamble in the markets." Bettors, gamblers, and investors all have different motivations, methods, and decision making processes.
• When emotions become involved in your decision making, you have personalized the issue. Emotions are inherent to our makeup, but emotional decision making in markets can be disastrous. As Gustave Le Bon wrote in The Crowd, a crowd is the single entity that best exhibits the phenomenon of emotional decision making.
• There are many ways to make money in the markets. There are a few reliable ways (emotional pitfalls) to lose your money.
• Come up with a trading plan and a written checklist that will guide your buy and sell decisions in the market. Tim Ferris cites another book, The Checklist Manifesto, that outlines the profound changes we see in hospitals when performance and safety guidelines are enforced with written procedural checklists.
• The best thing you can do as a trader or investor is learn to recognize and cut your losses. Due to our schooling system, we equate being wrong with losing points and esteem (for more on this, see Michael Martin's book, The Inner Voice of Trading.). In the markets, losing or making money is not about being right or wrong. We need to manage risk and stick with our process.
Check out the full interview with Brendan Moynihan here.
You can learn more about the habits of successful traders vs. losing traders in our related links below. Check them out!
1. Marty Schwartz speaks at Amherst College.
2. Why traders fail: Mark Minervini interivew.
3. What makes a great trader? Managing risk.
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