What I Learned Losing a Million Dollars

Smart people learn from their mistakes and wise people learn from somebody else’s mistakes.

Experience is the worst teacher. It gives the test before giving the lesson. —UNKNOWN

Personalizing successes sets people up for disastrous failure. They begin to treat the successes totally as a personal reflection of their abilities rather than the result of capitalizing on a good opportunity, being at the right place at the right time, or even being just plain lucky. They think their mere involvement in an undertaking guarantees success.

A fool must now and then be right by chance. —WILLIAM COWPER

Success can be built upon repeated failues when the failures aren't taken personally; likewise, failure can be built upon repeated successes when the successes are taken personally.

There’s nothing worse than two people who have on the same position talking to each other about the position.

Speculating is the application of intellectual examination and systematic analysis to the problem of the uncertain future.

Man is extremely uncomfortable with uncertainty. To deal with his discomfort, man tends to create a false sense of security by substituting certainty for uncertainty. It becomes the herd instinct. —BENNETT W. GOODSPEED, THE TAO JONES AVERAGES

the herd instinct and crowd behavior arise out of our desire to replace uncertainty with certainty,

The basic distinction between the individual and the crowd is that the individual acts after reasoning, deliberation, and analysis; a crowd acts on feeling, emotion, and impulses.

Are you long because you are bullish or bullish because you are long?

Speculating (and this includes investing and trading) is the only human endeavor in which what feels good is the right thing to do.

The minute it doesn’t feel good, stop doing it. It’s that simple.

The lesson here is: Taking either success or failure personally means, by definition, that your ego has become involved and you are in jeopardy of incurring losses due to psychological factors.

The only way to combat falling into the opinion trap is to follow Rand’s lead: think before you answer—if you even answer.

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.

The aim of the “professional gambler,” as he is called, is to make money. He can be recognized by deliberate and extremely disciplined wagering. His wagering is systematic and usually limited to infrequent but highly favorable opportunities. The behavior of the professional gambler is highly controlled and usually the result of a studied approach to his chosen game. He concentrates on games where the element of skill is sufficient to produce the possibility of a player advantage, such as blackjack and parimutuel betting. The professional gambler is similar to the stock arbitrageur in that they both take calculated risks. They are dealing with an uncertain outcome and seek to profit from their ability to anticipate the future or to see the future—in other words, to speculate. Professional gamblers are actually speculators because of the characteristics they exhibit when risking money. They are not seeking entertainment at the tables like gamblers do, and they are not trying to be right. They are trying to make money.

gambling creates risk while investing/speculating assumes and manages risk that already exists.

In betting and gambling games if you stop acting and do nothing, the losses will stop. But when investing, trading, or speculating, if you’re losing and stop acting, the losses don’t stop; they can continue to grow almost indefinitely.

The gambler isn’t playing a game; he is just playing.

trading is not about discovering a great strategy for making money but rather a matter of learning how to lose.

The truth is that trading, both successful and unsuccessful, is more about psychology than tactics.

The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.20 (William O’Neil)

The objective of the scenario approach is not to decide which scenario is right…. There is no ‘right’ answer.

you have prepared for different scenarios and know how you will react to each of them. This doesn’t mean you’re predicting the future. It means you know ahead of time what alternative courses of action you will take if event A, B, or C happens. The soundness of this approach for both markets and business is evidenced by something called scenario planning: “a structured, disciplined method for thinking about the future and a technique for anticipating developments in fluid political and economic situations.”9 The scenario technique was developed by strategists at the RAND Corporation to think through issues involving the nature of nuclear warfare

Your plan is a script of what you expect to happen based on your particular method of analysis and provides a clear course of action if it doesn’t happen;

Once you specify what price or under what circumstances you would no longer want the position, and specify how much money you are willing to lose, then, and only then, can you start thinking about where to enter the market.