Author: Jim Paul, Brendon Moynihan
|What I Learned Losing a Million Dollars (1994) documents author Jim Paul’s and other traders’ firsthand experiences, revealing what markets are like for people who invest for a living. The book is a compelling, first-hand account of how Paul lost money in the market—and what he learned from his losses.|
Detailed Summary of What I Learned Losing a Million Dollars
The author narrates his own experiences in trading in the book, where he reveals how making more than $2 million of gains in less than two years led him to lose it all and more through excessive overtrading and poor risk management.
In his career as a trader, Jim Paul consistently made money. He won a seat on the Chicago Board Options Exchange, where he traded options on the S&P 500 stock index. But during that time, he lost money. Not just a little money but millions of dollars.
A leading expert on investment psychology, Paul then goes on to explore the many reasons for the failure. He focuses on behavioral patterns that cause financial loss and ways to avoid these errors.
What I Learned Losing a Million Dollars reveals that losses can occur if you are overconfident, have false beliefs about trading, or think you have found a trading system that will make you rich.
What I Learned Losing a Million Dollars Key Points
The old saying, “You learn more and better when you fall,” fits perfectly in this summary of the book. The author lost not hundreds but millions of dollars. Read the following key points to learn how to invest in the best possible way.
You might also like to read the book Willpower Doesn’t Work Summary.
Your brain may work Against you by taking Risky Decisions
We all think we’re better than the average human at predicting what will happen next, from finding a parking spot to choosing who to marry. Studies have shown that when making decisions, we routinely choose to follow our intuition even when there are very good reasons not to.
But it turns out that when we make decisions like this, something in our brains, a phenomenon called “Regression to the Mean,” kicks in a little bit. If you flip the coin five times and it comes up tails every time, on average, the next flip will probably be tails.
This is a great, if simple, example of a pretty common human error. Decision-making is hard. We make tons of them every day. And often, we will make decisions based on some limited information—or a very small sample size. Just think of those times when you base your opinion about something based on one experience (you know you’ve done this).
The problem with this kind of thinking is that it’s often at odds with how we think things work. The opposite is true in statistics and data analysis—or any empirical science. You want to give as much weight to the most recent event as possible—to base decisions on lots of information.
Learn to Ignore the Crowd behavior to avoid the Loss
Peer pressure is the tendency to conform to a group even when it goes against your better judgment. Imagine you’re at a sporting event. The wave is rolling around the stadium, and everyone is in on it, even though they know it has to end soon. Even though you know the wave will end, you feel like an outsider if you don’t jump in.
Next time this happens to you, you can use the power of your brain to fight back. Crowds are psychologically powerful because of something called social proof. Crowd behavior is dangerous and can cause you to make bad choices, but if you learn how to ignore it, you can avoid loss.
Evaluation of Circumstances and Planning is an Important aspect before taking a Risk
In the 1960s, Warren Buffett was making business history. After a series of successful investments, the Oracle of Omaha became a superstar entrepreneur in the world of investment banking. The most astonishing fact about Buffett’s success? It was all on account of his planning.
Looking back at Buffett’s life as an investor, you’ll notice that he would prepare for any outcome before he made his next investment. He would think about the worst-case scenario and how that would impact his business.
That way, there would be no surprises when things didn’t go as planned, and he could keep moving forward. Buffett credits his ability to stay calm under pressure to his planning skills. He once said:
“You only have to do very few things right in your life so long as you don’t do too many things wrong.”
When it comes to business, planning is one of the most important aspects of your strategic plan, especially when you are trying to build something great. Before you take a risk or make any major decision surrounding your company, you must evaluate the circumstances and make a plan – if not a map – toward your goals.
Let’s take another example. In the 1980s and 1990s, Morgan Stanley saw significant successes because of planning and being able to anticipate the conditions and make a plan, whether that was partnering with another company or buying out a smaller firm.
This planning allowed Morgan Stanley to buy out Smith Barney, increase its clientele by 50%, and maximize its gross income by 300% in six years. The combination of planning and execution is an ingredient and key part of success. The power to create a plan — a road map — and execute that plan is a valuable asset.
What I Learned Losing a Million Dollars Quotes
“Smart people learn from their mistakes and wise people learn from somebody else’s mistakes.” Jim Paul
“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.” Jim Paul
“Acknowledging that losses are part of the business is one thing; taking and accepting those losses in the markets is something else entirely.” Jim Paul
What I Learned Losing a Million Dollars Review
The best thing about the book is that it is an example of a real person who has learned from his experiences. Now, he is telling others not to make those errors and mistakes in the businesses he made in the past. This book is great advice if you are looking to make money in the stock market.
To whom would I recommend the What I learned losing a million dollars summary?
- Anyone who is going to make his first stock investment.
- 40 years old who just lost a lot of money because of a market crash.
- Anyone wants to understand the pitfalls in investing and how to avoid them.