The late Jim Paul went from a poor Kentucky child to serving on the board of guvs of the Chicago Mercantile Exchange with a series of fortunate breaks and clever investments. However his hubris grew along with his success, and a series of awful financial investment decisions caused his failure in 1983. His brokerage company took away his task, his track record was destroyed, and he lost $1.6 million, $400,000 which was borrowed from close friends.
Paul spent the remainder of the decade getting himself back on track. By 1990 he was working in the futures study department at Morgan Stanley Dean Witter and Co., handling a group that included financial investment consultant Brendan Moynihan.
Moynihan and Paul paired to compose a book about his experience called ‘Whatever I Discovered Losing a Million Dollars’.
For his podcast, author and speaker Tim Ferriss spoke with Moynihan, who is now the managing director of Marketfield Property Management LLC, about the book.
Moynihan broke down three of the key takeaways, which he tells Ferriss are less about investing and even more ‘about the psychology of the errors we make.’
We’ve summarized them below:
1. Internalizing failure will keep you from rebounding.
‘When you lose cash, people have the tendency to internalize that. They tend to equate self-worth with net worth,’ Moynihan says, describing the method that individuals tend to equate their failures with their identity.
If you lose a huge amount of cash or suffer another huge obstacle, you will be holding yourself back from a rebound if you see yourself as a failure instead of someone who failed.
It was this worry of being a failure that kept Paul from terminating his financial investment in the soybean oil trade, despite numerous indications of a sharply declining market, Paul and Moynihan compose in their book. Recalling, Paul composes, he wants he would have merely accepted the failure and moved forward prior to putting himself through even more problems.
2. There’s a distinction between risk-taking and gambling.
Being a clever investor requires taking numerous threats, and not each one of them will lead to success. But wise high-risk decisions are still very different from gambles, Moynihan informs Ferriss. Gamblers marry their ego to their cash, which is what Paul did.
‘They wish to be right. It’s not about the cash. In gamblers, that is a condition … Cash is just a ticket to go into. They’re there for the adrenaline rush,’ Moynihan states.
3. Psychological decision-making is harmful, specifically when it’s done as a group.
You’re a human. It’s natural to have emotional responses to scenarios, whether favorable or unfavorable. Simply make certain you learn how to set feelings aside and look at something objectively before deciding.
Paul covers an example of when he let his feelings lead his trading, which he would do on an even grander scale with the soybean investment that lost him over a million dollars.
In 1980, his company partner informed him he got a pointer that a business was a possible takeover prospect within the next 2 months at $60 per share. Paul ended up buying 10s of countless choices when they were selling for simply numerous cents and informed all of his customers to do the exact same. Within three weeks, the stock rose to $38 and the options were each worth $4.
He might’ve made a large revenue by offering at this point, but he, his partner, and his clients pressed each other to claim the reported takeover. It would have made Paul $7.5 million, and he and his fellow option-holders began tossing concepts of grand trips backward and forward as the market closed on Friday. On Monday, the stock opened down $6 and he discovered that the reported takeover was off the table. The choices wore.
In retrospect, Paul writes that he saw this as a prime example of the dangers of groupthink, where he and his fellow investors forgot the fact that they just weren’t compromising reputable info. Despite that, they in fact had a possibility to all make a lot of cash had they decided to sell that Friday. He composes that it was a mistake to get involved a fantasy of flying in the Concorde and staying at the Waldorf-Astoria, which clouded his judgment.
Moynihan shares more stories about Paul and the lessons they discovered in Ferriss’ podcast, The Tim Ferriss Program, along with the new edition of ‘Exactly what I Learned Losing A Million Dollars.’