Four Things I Learned from the Book “What I Learned Losing a Million Dollars”

The investment industry is short on three things:

The book What I Learned Losing a Million Dollars has all three in spades. It’s one of the best investment books I’ve ever read, regardless of what kind of investor you are – trader, indexer, venture capitalist, doesn’t matter.

Jim Paul and Brendan Moynihan tell a story – self-described by the book’s title – about the darker and honest side of investing. It is full of succinct lessons on risk that anyone handling money can benefit from.

Here are four things I learned.

1. We systematically overlook luck’s role in investing.

The authors write:

Some portion of clueless beginners will get it right simply by chance— for a while. This potential for temporary success by pure luck beguiles people into thinking that trading is a lot easier than it is. The potential for even temporary success doesn’t exist in any other profession. If you have never trained as a surgeon, the probability of your performing successful brain surgery is zero. If you have never picked up a violin, your chances of playing successful solo violin in front of the New York Philharmonic are zero. It is just that trading has this quirk that allows some people to be successful temporarily without true skill or an edge— and that fools people into mistaking luck for skill.

This has two important parts.

One is that success can lead to overconfidence, which eventually backfires. This is especially dangerous early on when you don’t have much experience, because big success without experience or formal training leads you to think you’re not just talented, but naturally talented, and beyond the need of study or mentorship. Herb Kelleher of Southwest Airlines put it this way: “I think the easiest way to lose success is to become convinced that you are successful.”

The second part is that with millions of investors around the world, it is nearly certain that some have achieved long-term success driven primarily by luck. But we rarely think about that. We instinctively associate investing success with skill, even when we know investing has a large element of luck involved. An important question we don’t ask enough (because we can’t answer it with certainty) is: What famous investor with an excellent long-term record do we worship whose success is primarily due to luck?

The solution here is focusing on processes versus outcome.

2. Winning is overwhelmingly a mastery of losing.

Paul and Moynihan write:

What winning traders share is that they all understand that losing is part of the game, and they all have learned how to lose.

Nearly all successful long-term portfolios will derive the majority of its gains from a minority of positions. Which means the majority of your individual investments may be disappointments, if not failures.

This ins’t a problem. It’s a normal part of a capitalistic system that doesn’t like outliers, but can be unbelievably generous to a few outliers when they succeed.

One of the hardest concepts to wrap your head around, but one that is present more often than not, is that you can be wrong on 60%+ of your individual investments and still do well over time.

This is also true with market volatility: The stock market can be below it’s all-time high 95% of the time and still earn sensational long-term returns. In fact, that’s what’s happened over the last century.

It’s true as well for businesses. Few companies have mastered failure as well as Amazon. It views loss as in inevitable part of trying something new, and something to learn from. Jeff Bezos said of its flopped Fire phone: “If you think that’s a big failure, we are working on far bigger failures. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip.”

The trick is a combination of ensuring that no single investment can wipe you out, and learning to deal with the psychological torment that comes from being humbled by the majority of your decisions turning against you. It’s learning how to lose, and accepting loss as a normal part of the process.

3. Everyone is emotional. But some people learn how to deal with their emotions better than others.

From the book:

Emotions are neither good nor bad; they simply are. They cannot be avoided. But emotionalism (i.e., decision making based on emotions) is bad, can be controlled, and should be avoided.

One of the most enlightening parts of the book The Snowball was learning about how Warren Buffett, despite being known as an unemotional investor unswayed by booms and busts, is a highly emotional person who deals with depression, excitement, and tempers as much as anyone else.

Of course he does: He has dopamine, serotonin, and cortisol running through his body just like you and I do. He’s emotional.

But he’s built a brick wall between his emotions and his financial decisions, which is what really matters. There is a decent chance I’ll be emotional after next week’s election. But there is virtually no chance I’ll change how I invest.

4. Crowds are more powerful than we think.

From the book:

Once individuals have formed a crowd, however like or unlike their mode of life, their occupation, their character, or their intelligence, that fact that they have been transformed into a crowd puts them in possession of a sort of collective mind that makes them act in a manner quite different from that in which each individual would act, were he in a state of isolation. A person in a crowd also allows himself to be induced to commit acts contrary to his most obvious interests. One of the most incomprehensible features of a crowd is the tenacity with which the members adhere to erroneous assumptions despite mounting evidence to challenge them.

A quirk of investing is that most people think they have a unique strategy that sets them apart from the crowd, but start to worry when the crowd acts different than they do out of fear of missing out. It’s difficult to come to terms with two conflicting ideas: You assume you’re thinking independently because you didn’t consult anyone else, but your thoughts are influenced almost entirely by the actions of a large group.