What I Learned Losing a Million Dollars

188 Pages·1994·2.37 MB·English

by  Jim Paul

What I Learned
LOSING A
MILLION
DOLLARS
Jim Paul
and
Brendan Moynihan
1
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COPYRIGHT WARNING AND NOTICE:
It is a violation of federal copyright law to reproduce all or part of this publication or its
contents by xerography, facsimile, scanning or any other means. The Copyright Act
imposes liability of up to $250,000 per infringement. Information concerning illicit
duplication will be gratefully received.
©Copyright 1994-2007 Brendan Moynihan. All rights reserved.
ISBN 0-9635794-9-5
This book is not intended to provide specific investment advice, only general
observations. Neither the author, the publisher, nor the sources cited accept
responsibility for any losses incurred as a result of applying its ideas.
The Trader
The symbol of all relationships among such men, the moral
symbol of respect for human beings, is the trader. We, who live
by values, not by loot, are traders, both in manner and spirit. A
trader is a man who earns what he gets, and does not give or
take the undeserved. A trader does not ask to be paid for his
failures, he does not ask to be loved for his flaws. A trader does
not squander his body as fodder, or his soul as alms. Just as he
does not give his work except in trade for material values, so
he does not give the values of his spirit -- his love, his
friendship, his esteem -- except in payment and in trade for
human virtue, in payment for his own selfish pleasure, which
he receives from men he can respect. The mystic parasites who
have, throughout the ages, reviled the trader and held him in
contempt, while honoring the beggars and the looters, have
known the secret motive of their sneers: a trader is the entity
they dread-- a man of justice.
Ayn Rand
v

Contents
Foreword xi
Preface xiii
Introduction XV
PART I Reminiscences of a Trader
1 From Hunger 5
Goose Nickels 6
No Little League 6
2 To the Real World 11
Frat Life 11
Is Gin a Drink or a Card Game? 13
Very Little Class 15
A Glimpse of the Future(s) 18
Out of School 18
You're in the Army Now 20
The Brain Watchers and the Butterfly 26
3 Wood That I Would Trade 33
Chicago 35
Learning the Trading Floor 37
Life in the Fast Lane 37
Zenith 39
4 Spectacular Speculator 41
Timber Tumbles 41
The Arabian Horse Fiasco 42
Soybean Oil Spreads 44
Road to Riches 45
The Death Knell Phone Call 50
vii
Soybean Oil Gets Slippery 52
Vertigo 55
Nadir 58
5 The Quest 61
How Do the Pros Make Money? 61
Advice and Dissent 62
Averaging a Loss 63
Top and Bottom Picking 63
Spreading Up 64
Losses 65
PART II Lessons Learned
6 The Psychological Dynamics of Loss 73
External vs. Internal Loss 75
How External Losses Become
Internal Losses 76
The Five Stages of Internal Loss:
Denial, Anger, Bargaining,
Depression, Acceptance 77
The Five Stages of Loss and the
Market Participant 80
Discrete Events vs.
Continuous Processes 81
7 The Psychological Fallacies of Risk 85
Inherent Risk 88
Created Risk:
Investing, Trading, Speculating,
Betting, Gambling 88
Behavioral Characteristics Determine
the Activity 91
A Dangerous Combination 93
Psychological Fallacies 94
Profit Motive or Prophet Motive? 98
Vlll
8 The Psychological Crowd 101
Emotions and the Crowd 103
Conventional Views of the Crowd 103
What is a Crowd? 105
Characteristics of a Crowd 106
Two Psychological Crowd Models 109
Delusion Model: Expectant
Attention, Suggestion,
Contagion, Acceptance 109
Illusion Model: Affirmation,
Repetition, Prestige,
Contagion 110
Emotions 110
Hope/Fear Paradox 111
Mania & Panic: Where Hope
and Fear Meet the Crowd 112
Part III Tying It All Together
9 Rules, Tools and Fools 117
Tying it All Together 118
Dealing with the Uncertainty
of the Future 119
Decision-Making 121
The Plan 126
11 Herbs and Spices 126
A Plan vs. Loss, Risk and the Crowd 131
A Plan and Objectivity 136
Conclusion 147
Postscript 155
Appendix 165
Notes 167
Bibliography 171
ix

Foreword
I received a copy of What I Learned Losing A Million Dollars in
the mail along with a letter from the authors inquiring if I
would be willing to preview and comment on the book. I must
admit, since I didn't know the authors, I didn't plan on reading
the entire book. But the title intrigued me, so I took the book
with me on vacation and began reading it on the airplane. Once
I started reading it I couldn't put it down.
While the book is particularly instructive for new entrants
to the securities markets, there are lessons for the seasoned pro
as well. The authors draw terrific analogies between gambling
and investing and what most people do in both to cause their
downfall. I am a money manager and in my thirty years in the
investment business I have often noted the blurred line
between the two activities. My father taught me when I was
very young not to gamble against the odds. If investors or
speculators in the securities business could learn the same
lesson they would be much more successful.
This requires doing your homework and developing a
plan ahead of time. Most people don't have any idea what they
will do if their investments go up or down just as they don't
know how they will react if their gamble wins or loses. The key
is to make rational decisions ahead of time on how you will
react -- win or lose. That way you won't wind up making the
awful emotional decisions which take place after the market
moves. Remember, no one plans to fail, they just fail to plan.
I believe all different styles of investing can be successful.
Momentum investors, growth investors, value investors will all
be more successful if a non-emotional plan is utilized with
discipline. Those who read and understand this book will have
a major advantage in the investment game; they will be able to
invest unemotionally while almost all other investors and
speculators are driven by their emotions.
Charles L. Minter, President,
Comstock Partners, Inc.
Xl