Monday, March 11, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

Lessons From What I Learned Losing a Million Dollars

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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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Wednesday, January 30, 2019, Los Angeles, California


Notes From My Journal

Why “Best Books” Lists Are Sort of Silly… and My “Best Books” List for 2018

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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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Notes From My Journal

An Unexpected Gift From My Father

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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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From My Work-in-Progress Basket

Elegant Solutions

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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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Miscellaneous Briefs

Unfinished Business

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I have a library of at least a thousand books, a third of which I have never read. I’d like to. I also have twenty years’ worth of memos I’ve written that I’d like to re-read.

I have always fancied that I’d spend the last five or ten years of my life seated comfortably in a chair across from the ocean, catching up on all that reading.

I’m not sure I’ll actually do this since I am habituated to more active intellectual challenges, such as running businesses and writing. But the idea appeals to me.

There could be worse ways to fade out of the picture.

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