Lessons From What I Learned Losing a Million Dollars

Part 1: The One Secret That All Successful Money Makers Know and Use

It was the only one left in my audiobook library. I didn’t remember buying it. I’d never heard of it or its authors (Jim Paul and Brendan Moynihan). And the title wasn’t a turn on: What I Learned Losing a Million Dollars.

I mean, really. There are probably millions of businesspeople and investors that could make such a claim. You lost a mere million? Don’t bore me. I want to hear from someone that’s lost a hundred million!

But it was, as I said, the only audiobook in my library. So I began listening to it… and was drawn in.

The first third was a breezy memoir of Jim Paul’s early life, education, and how he rather accidentally became a commodities trader, earning big bucks and living large. Then there was the downfall – a pretty exciting account of going broke and into debt fast.

I almost shut it off there, thinking I’d heard the best part, but I’m glad I didn’t. What followed was an analysis of not just Paul’s pride-bound bad thinking but of the mistakes all investors make sometimes (and some investors make all the time), as well as other insights that rang true.

Paul’s account of his experience is, in part, the story of a smart person that cared more about being right than making money. It is also a portrait of the mortal sins of wealth building: arrogance, ignorance, and greed.

In reviewing the mistakes that led to his million-dollar loss, Paul first examines his trading strategy. Was the strategy wrong? Should he have been using another one?

Then he takes you through a quick review of the strategies of some of the most successful investors of modern times. He demonstrates that each of those strategies was different, and all of them had rules that forbade practices that were followed in the others.

The rules that worked for George Soros, for example, are very different than the rules that worked for Warren Buffett. John Templeton’s strategy worked well for him, but would have not worked for Peter Lynch, and vice versa.

Paul concludes, convincingly, that there is no such thing as a successful trading strategy, and that the search for a winning strategy is a waste of time and money. Instead, he argues that if there is a secret behind the fortunes of Buffett and Soros and the like, it must be something they all did. And when he looked for it, he found it.

The single protocol followed by all of them, regardless of their profit strategies – was about limiting losses.

Paul doesn’t argue that any profit strategy can work. His point is that any profit strategy that isn’t coupled with a loss-prevention strategy is doomed to fail.

I thought about this. And it is true of my experience. Nearly every time I put money into an enterprise without some sort of stop-loss mechanism, I ended up losing most or all of it. And if I look at how I acquired and built wealth over the last 40 years, the strategies that worked all had serious downside protection.

When I consider an investment these days, I spend no more than a moment thinking about the upside potential. I’ve been doing business and investing long enough to know that dwelling on how much money you can make reduces your investment intelligence by about 98%. So when someone pitches an idea to me, I focus my thinking almost entirely on how I can limit my losses if things don’t work out.

There are three ways that I limit my losses:

  1. I use stoplosses– actual stop losses for stocks or equivalencies for other assets – to close out my position at a predetermined point if the investment goes south and hits my “get-out-now” number.
  2. I use positionsizing to determine how much I will invest in any given project. This is very powerful, perhaps the most powerful technique for safeguarding and developing wealth. I have a predetermined dollar figure that I will invest in businesses about which I know little, and another for investments about which I know a lot. When you have a modest net worth, that figure might be 5% of it. As your wealth grows, you reduce the percentage. These days, I never invest more than 1% of my net worth in any single investment or business deal.
  3. I diversify. My investment portfolio consists of real estate (mostly income-producing but some land banking), “Legacy” stocks (large, well-capitalized, dividend-bearing stocks), super-secure bonds (if the yields are decent), private lending (for secured assets), business ventures, options (selling puts on Legacy stocks), and cash.
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Why “Best Books” Lists Are Sort of Silly… and My “Best Books” List for 2018

When I first read Sapiens: A Brief History of Humankind by Yuval Noah Harari, I read it quickly. It was the selection of the month for my November book club – and by the time I got to it, I had less than two days to go through it.

No problem. I arrived at the Cigar Club, book in hand, with plenty to say. And most of that was a mixture of admiration and dismissal. Among other things, I said that it was “the best-written book that told me things I already knew.”

Two weeks later, I listened to it on Audiobooks, and I loved it. And now I’m reading it again…  and I’m thinking it may be one of the best books I’ve ever read!

Each chapter is a book in itself. And each section of every chapter contains at least one idea that feels big and new and important. This is a book that I will read over and over again.

I felt the same way about Pride and Prejudice when I first read it, which was 12 or 15 years ago. I’ve read it twice since then, and I’d be happy to read it again today.

But had I read  Pride and Prejudice as an undergraduate, I might have dismissed it as superficial and melodramatic. I know I felt that way about Henry James’s Portrait of a Lady and The Ambassadors when I read them for Dr. Powers at the University of Michigan. I pretended to admire them because he did, but they felt insignificant to me then. (“Brilliant writing about trivial human affairs,” is what I said in my journal.)

I don’t feel that way about those two novels now that I’m older and less cynical. Quite the contrary, I think they are brilliant and deep.

And that’s one of the problems with lists of the “best” books. The pleasure we get from books depends greatly on the level of intellectual and emotional sophistication we have when we read them. On the one hand, a book that strikes us as luculent in our youth might seem dim or even dimwitted decades later. On the other hand, a book that bores us in high school might thrill us in our middle age.

The same can be said of almost any aesthetic object. That painting of the young girl with the huge brown eyes that swept us away when we first saw one in Woolworth’s when we were nine years old now looks like the intentionally bathetic work of a commercial panderer.

I’m not suggesting that there is no such thing as bad, better, and great books. I’ve made the point elsewhere that I believe very strongly that the potential pleasure and elucidation we get from a book depends primarily on its intrinsic qualities. As a general rule, books that are broader and deeper and also subtler tend to get better the more you read them because they are better. They are better because they have complexity, depth, and subtlety, qualities that are enhanced by rather than diminished by repeated exposure.

What I’m saying is that best-books lists should be seen as what they are: the temporary feelings of one person – the list maker – at a particular time.

That said, here is my list of “best” books that I read (or reread) in 2018:

  1. Sapiens: A Brief History of Humankind by Yuval Noah Harari
  2. The Good Earth by Pearl Buck
  3. Brief Questions to the Big Questions by Stephen Hawking
  4. The Sheltering Sky by Paul Bowles
  5. Beyond the Grave by Jeffrey L. Condon
  6. For Whom the Bell Tolls by Ernest Hemingway
  7. Fox 8 by George Saunders
  8. 21 Lessons for the 21stCentury by Yuval Noah Harari
  9. Dress Her in Indigo by John D. MacDonald
  10. The Soul of America by Jon Meacham
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An Unexpected Gift From My Father

Monday, October 22, 2018

Delray Beach, FL– My friend Steve Leveen and I once had an enjoyable exchange on the question of whether you should write in the books you read.

There were good arguments on both sides. If, for example, you are reading the first edition of what might, one day, become an important book, it would be foolish to mark it up. If, on the other hand, you are reading a non-fiction book on a topic that’s important to you, underlining and marginalia could be very helpful when you want to refer back to it.

And here’s another argument in favor of marginalia: My brother Andrew just sent me a coverless and battered early edition of James Joyce’s Ulysses. “I ran across Dad’s annotated copy,” he said, “while cleaning out his basement. You were always the modernist. So I thought I’d pass it along.”

I looked through the book and, sure enough, there were notes on almost every page. Notes that he wrote in preparation for teaching. Some were scholarly (i.e., “See E Pound re this”). And some were personal (i.e. “Beautifully put!”).

I’ve sent it out to have it bound in leather. When it comes back I’ll read it. But I ’ll be reading it not for the story or to better understand Joyce but to hear my father speaking.

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Elegant Solutions

Saturday, September 22, 2018

Delray Beach, FL – In his book In Pursuit of Elegance, Matthew E. May tells a story about Drachten, a Dutch village that had a serious problem with traffic at its main intersection. The village hired an expert, Hans Monderman, to help them reduce congestion and accidents.

The conventional way to do this is to implement various measures to get cars to slow down. Unfortunately, such measures – including stoplights, radar-controlled equipment, and a beefed-up police force – are expensive. Since Drachten had a small budget, Monderman was forced to do something different.

He realized that this was an opportunity for him to test a theory he had been developing about human behavior: that the more controls you impose on people, the less self-control they are likely to exhibit. In his words, “Treat people like zombies and they’ll behave like zombies. But treat them as intelligent, and they’ll respond intelligently.”

So instead of increasing traffic controls in the middle of town, he reduced them to a startling degree. Instead of adding regulations, he suggested repealing most of them. No speed bumps, no speed limits, no signs, no mandates about right of way.

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Recommended Reading

 21 Days to a Big Idea!

By Bryan Mattimore

2015, 156 pages

In 2015, Bryan Mattimore was hired by the librarians of the Chicago Public Library to help them work on their creativity. He challenged them to come up with a brand-new idea in just 30 seconds. They couldn’t do it. Then he led them in a little exercise.

He gave each of them two sets of cards. One set was nouns: man, boy, dog, house, socks, etc. The other was adjectives: fast, slow, tall, short, simple, fancy, dull, glowing, etc. He told them to mix and match the nouns and adjectives until they saw something that felt like a new idea.

In the next few minutes, dozens of interesting ideas were offered up. Some were crazy bad. Some were promising.

This is one of six or seven brainstorming strategies you will find in Bryan  Mattimore’s 21 Days to a Big Idea!

To use this brainstorming technique as a marketing or product-development tool, you need to work with nouns that pertain to your industry. If you sell vitamin supplements, for example, nouns like crowbar and space probably won’t be helpful. But you can and should be able to come up with dozens if not hundreds of nouns that will.

After you have your list of nouns, select one and run it against your list of adjectives until you find a good idea. If you don’t come up with anything, select another noun and do the same thing.

I’ve actually used this brainstorming technique many times and I can attest to its effectiveness. It may not give you instant gold, but it will get the mining going.

Another brainstorming technique Mattimore recommends involves asking yourself 6 simple questions: who, what, when, where, why, and how. If you are a financial planner, for example, you could ask:

  1. Besides my current customer profile, who else might be able to use my service?
  2. Of the many investment vehicles I recommend, what is the most needed?
  3. When is the best time of day to contact prospective customers?
  4. Besides the media I’m currently using, where else might I find them?
  5. If a customer asks why I’m in this business, how should I respond?
  6. How can I take action on the answers to the above 5 questions?

A third technique is one that Mattimore calls “billboarding.” He says it is great for identifying a product’s unique advantages and consequently coming up with strong sales copy.

  • First, be clear about what your idea is and what problem it solves for customers in their everyday lives.
  • Second, list your product’s benefits. What are all the things it can do for your customers?
  • Third, pick out the strongest benefit your product has to offer.
  • Focusing on that benefit, create a catchy name for your product as well as a memorable phrase that captures exactly what it is about your product that makes it so special.

Example: A cardboard stroller for children.

The Benefits: It’s lighter and easier to move and transport than a regular stroller, but is still secure enough for you to trust that your baby is safe inside. It’s also less likely to cause injury if it falls over. And it’s cheaper. On top of these pragmatic benefits, you and your kids can draw on the cardboard, keeping them entertained and engaged during trips to the grocery store.

Thus, the headline of your ad could be: The Playhouse Stroller: Go Shopping and Your Kids Will Have Fun Too!

This is not a great book. It’s a good book. A quick read that will likely give you one or several useful tools to use to brainstorm better.

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Recommended Reading

A Short History of Nearly Everything

By Bill Bryson

2003, 560 pages

 The title suggests the challenge. Who would have the nerve to write such a book? Of course, if you’ve read Bryson you know he’s not a “serious” writer. He’s just a very good one. And he has a sense of humor, some of which is pointed at himself.

A Short History of Nearly Everything is a tour de force. I enjoyed it immensely from cover to cover. It’s a big book but it reads fast. As promised, it’s an historical account of the history of the universe and much of human history, from the Big Bang to present day.

It took Bryson three years to research and write – but that seems like no time compared to the accomplishment.

* * *

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Recommended Reading

 When: The Scientific Secrets of Perfect Timing

By Daniel H. Pink

2018, 272 pages

 Timing Your Day for Mental and Physical Peaks

It’s taken me decades to work out a daily routine that takes full advantage of my body’s natural chemistry. It took so long partly because I’m stubborn and partly because I believed that working non-stop for 18 hours was in and of itself a good.

Had I known what behavior scientists know today, I might have figured things out sooner. It turns out that my personal biochemistry is typical of most people.

In When: The Scientific Secrets of Perfect Timing, Daniel H. Pink looked at the results of about 700 scientific and academic studies and came to some interesting, though not surprising, conclusions.

Example from a Cornell University study of 500 million Twitter accounts: Positivity peaks in the morning, drops swiftly in the afternoon, then climbs back up in the evening.

Other studies show the same thing in reverse: Negativity rises in the afternoon and falls in the evening.

 Practical Applications:

  • Schedule your pep-rally meetings and sales pitches in the morning.
  • Want to scare someone? Do it in the afternoon.
  • Do the mindless busywork in the afternoon.
  • Take a 5-to-7 minute break every hour and a half-hour walk or exercise break midday.
  • Take a nap when you are tired, but only for 10 to 20 minutes. (It takes 20 minutes for caffeine to get into your system, so have a cup of coffee before the nap.)

 Note: These findings apply to 75% of those studied. The other 25% have different patterns. Half are larks, rising extra early. The other half are owls, rising later and working later. Larks are generally happier than owls. Young and old people tend to be larks and teenagers tend to be owls.

 

 

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Recommended Reading

 South and West: From a Notebook

By Joan Didion

2017, 160 pages

Not a novel. Not a memoir exactly. More a series of notes about a trip Didion took with her husband through the South and some notes she made during the Patty Hearst trial that turned out to be about privileged young women growing up in California. The thesis of the book, if there is one, is that the culture of the South, however backwards we feel it is, is steeped in history and likely to endure, while that may not be true of California’s very different culture. It is really well written: sparse and precise and at times poetic.

This shouldn’t matter in evaluating a writer, but it affected my judgment: Didion was a very attractive young woman who grew up wealthy and well connected. I believe I wanted to dismiss her as trivial before I read her. I could not. She’s a serious thinker and a very smart and skillful writer.

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Recommended Reading

Dress Her in Indigo

By John D. MacDonald

1969, 211 pages

A “Travis McGee” crime novel. My first. And, frankly, I was surprised at the writing. It was not film noir-ish, as I expected. But able and smart.

The style is quick and succinct and somehow modern. And the lead character, Travis McGee, is smart and experienced – a bit more than I wanted in some cases.

The story is about McGee investigating the last days of the daughter of a successful executive. The daughter – Bixie – apparently died on a trip to Mexico and the executive’s dying wish is to find out what she was doing there.

As it turns out, Bixie is still alive and is being held hostage by a rich older Spanish woman who wants to keep her as a sex slave. Arriving at that point in the novel, I was not surprised to find her still breathing. What surprised me was the sex slave bit.

I found it interesting that as late as 1969 MacDonald was treating lesbianism as an aberration. I found myself trying to recall my own feelings on the subject when I was a sophomore in college.

I read the book hoping to enjoy it like I’ve enjoyed the hardboiled fiction of Jim Thompson and Elmore Leonard. I’ll read another one since MacDonald’s popularity demands it.

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Recommended Reading

The Violet Hour: Great Writers at the End

By Katie Roiphe

2016, 306 pages

 End-of-life anecdotes/accounts of a half-dozen famous people.

  • Susan Sontag: Influential lesbian. Beat cancer once. Fought to the bitter end. Arrogant to the point of finding it hard to believe she would ever die.
  • John Updike: Took his cancer stoically.
  • Sigmund Freud: Wanted to die rationally. Smoked 20 cigars a day.
  • Dylan Thomas: Romantic infatuation with death. Drank himself to death.
  • Maurice Sendak: Never felt loved by his parents, brought a dark sense of death and danger into his illustrated “children’s” books.
  • James Salter: Another American writer with a stoic approach to death. “Don’t dwell on it,” he told Roiphe during their interview. (He was her only living subject.)

With every passing year, I spend more time thinking about – or trying not to think about – death. Here’s a chance to discover how six of the more interesting minds of the 20th century thought about the topic.

Their deep thoughts on death are presented in a very easy but literary way, which makes the book a rewardingly quick read. And there are some good insights. Nothing new or profound, but heartfelt and unpretentious.

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