The Secret to Not Losing

On September 12, 2013, I officially became an investor! I bought my first stock. It was exciting. Champagne flowed.

I had spent the past eight months diligently studying the Intelligent Investor and learning how to analyze companies.

My strategy was simple: invest only in well-managed, stable, undervalued companies with long term prospects. I wasn’t going to give in to the emotionalism of the marketplace like some idiot.

September 12, 2013: Armed with my elite investor knowledge, I bought 13 shares of NQ Mobile (NQ) at $18.45based on a random tip from a friend. I knew little beyond the company’s PE ratio. Yes, young Curtis, this is totally “intelligent investing….”

October 3, 2013: The price hiked to $21.04. Great! I quickly bought 12 more shares (and more champagne).

October 21, 2013: Shares jumped to $25.35, up 37% in just over one month! I was on track to make over $120! I proudly sold 10 shares, thinking I’d sell the rest at a higher price.

Sadly, that day never came.

October 24, 2013: The world ended. NQ dropped over 70% in minutes due to accusations of fraud (thanks a lot, Muddy Waters!).

October 29, 2013: I grudgingly sold my remaining 15 shares at a measly $9.69 apiece.

Curtis sells 10 shares of NQ Mobile (NQ).

The point at which I proudly sold 10 shares.

Luckily, I had only lost $113.28. It could have been waaay worse.

And for one man, it was.

Jim Paul, coauthor of the best-selling book, What I Learned Losing a Million Dollars, lost millions in the stock market. In his book, Jim writes about his quick ascension to wealth, his devastating downfall, and his reflections on investing.

Here are a few of my main takeaways from his book.

What I Learned Losing a Million Dollars by Jim Paul

What I Learned Losing a Million Dollars, by Jim Paul

Don’t take this personally, but you’ve won a million dollars :-/.

As in many areas of life, the biggest challenge we face in investing is our ego.

When we win, we credit our own foresight and intelligence, and we forget about the advantages or lucky breaks we had along the way. Our market position becomes a matter of pride – of being right or wrong. When the market starts to turn against us, instead of sacrificing our pride and owning our mistakes, we stubbornly insist that the market is wrong, all the while racking up enormous losses.

This happens whenever we attach our self-esteem to something external (and therefore fallible). In order to preserve our self-esteem, we need to defend that external thing, whether it’s our market position, grade point average, favorite sports team, salary, chess rating, etc. This just causes unnecessary psychological turmoil.

The key to avoiding this is to stay humble and to treat whatever it is you’re doing as a game. Don’t treat objective facts subjectively. Don’t base your self-esteem on wealth, talent, or possession. Don’t personalize success.

Pride goeth before destruction, and a haughty spirit before a fall.

The Holy Bible, Proverbs 16:18

Don’t be a loser.

If you study those who have acquired wealth in the market, you’ll inevitably find a variety of contradicting advice: diversify your investments/concentrate in one area; hedging is both smart and a great mistake; do and do not follow market trends, etc.

Why so much contradiction?

The answer: there are many ways to win, but only a few ways to lose. The secret is knowing how to avoid losing.

Form a Ulysses Pact

In Greek mythology, Odysseus ties himself to the mast of his ship, knowing he will be tempted by the sirens and lured to his death. This foresight is called forming a Ulysses Pact.

In investing, we should avoid the siren call of market mentality by having our own Ulysses Pact – a predetermined exit point which we choose before we even enter the market.

The thing is, we tend to see what we want to see (confirmation bias), and if we choose our exit point after we’ve already invested, we will tend to interpret the data in terms of what we want to believe (which is that we’re always right). Any choice we make will likely be highly skewed and unbounded by reality.

The key to not losing is to have strict criteria (time, price, information) as to when we’ll exit the market, no matter what. This helps us avoid focusing on what we think the market will do, and instead focus on what it is actually doing.

Odysseus and the Sirens - the Ulysses Pact

As the sailors passed by the island, they plugged their ears and sucked in their stomachs.

My decisions are purely logical. That’s why I bought this cute puppy.

Humans are emotional creatures. As much as we like to imagine that we’re purely logical (and trust me, engineers are the worst culprits), we ultimately make decisions based on emotions.

(Side note: even if we do make calculated, logical decisions, one could say that we’re merely trying to feel and appear intelligent and logical, and are therefore fueled by an emotional need. With psychology, you just can’t win!)

The idea is not that we should avoid emotions, it’s that we should avoid emotionalism.

In other words, it’s okay to feel excited or panicked, but don’t let these emotions make your decisions. Smart investing is all about emotional discipline. Stick to your plan, do your due diligence, and don’t personalize the market.

I decided that I wasn’t going to quit playing, but I was going to quit losing.

Jim Paul

Would an idiot do that?

Ah, the timeless wisdom of Dwight Schrute. Although his statement is comedic, it does have some merit.

We’re used to seeking ways to win, but sometimes we should be looking for ways to not lose. We can ask ourselves, “what would it take to lose in this situation?” and then do the opposite.

For example:

  • What would it take to not lose weight? Eat tons of sugar, sit for hours a day, drink alcohol, blame your genetics/glands and take no action
  • What would it take to not get rich? Don’t invest, waste your time, don’t improve yourself, buy liabilities instead of assets
  • What would it take to not have a happy relationship? Criticism, personal insecurity, jealousy, lying, having drastically different values or interests

Don’t use this exercise as an excuse to do the bare minimum – use it as a way to shift your perspective and improve your strategy.

In conclusion…

In order to achieve and maintain success, we need to let go of our ego. Once we stop using external factors to build our internal value, we can look at the facts objectively and take clear, thoughtful actions according to a set plan. If we can avoid personalizing the market, refrain from brash emotionalism, and know when to cut our losses, we can avoid the psychological traps that cause us to fail and drastically improve our chances of not losing.

***Jim Paul’s book goes into far more detail on the psychology of loss, crowd behavior, and investing. I’d highly recommend that if you found this article interesting, you read his book, What I Learned from Losing a Million Dollars. Don’t miss out! Buy it now before prices SKYROCKET!!!***

***Be sure to FOLLOW this blog for more posts on business, psychology, and personal development.***

One comment

  1. […] We should be sure to design our experiments so that a single failure doesn’t mean total annihilation. In other words, we shouldn’t bet our entire life on a single dream. Instead, we should make small bets repeatedly and persistently (see: the Secret to Not Losing). […]

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