Investor's Library

Review of
What I Learned Losing a Million Dollars

By Jim Paul and Brendan Moynihan

Reviewed by Ed Dobson, President, Traders Press, Inc.

This is a valuable book on trading psychology. It's not your typical book about trading, which usually purports to show how to get rich by revealing secret trading strategies or can't-lose analysis methods or describes how the author discovered the secret to unlimited wealth and proceeded to extract it from the market.

Instead, as the title implies, it is a tale of woe from a self-admitted loser, who, in the space of three months, lost his entire net worth of 1.6 million dollars and went deeply into debt. It is co-authored and self-published by Jim Paul and Brendan Moynihan, both with extensive backgrounds in the brokerage industry.

The underlying theme is that, if one aspires to be a successful trader, it is more beneficial to study the pitfalls and mistakes that lead to losing than to focus on ways to make money. The reader is shown that there are many, many ways to trade profitably, almost as many as there are participants in the market. Yet, ironically, the majority of traders lose. On the other hand, there are very few ways to lose.

Many highly successful traders (such as Jim Rogers, Paul Tudor Jones and Richard Dennis) are said to espouse the opinion that the most important factor in achieving success is the avoidance of large losses. Studying the factors that lead to large losses and how to avoid them is the major focus of this outstanding book…an unusual and innovative approach.

The authors stress that personalizing losses (i.e., taking them personally rather than viewing them as a necessary part of a business venture) is a major factor leading to failure. They contend that success can actually be built on repeated failures (remember the story of Jesse Livermore?) if the failures aren't taken personally. Conversely, failure can be built on repeated successes when the successes are taken personally.

The book is divided into three sections. The first, "Reminiscences of a Trader", is fascinating reading. A priceless quote leads off: "Experience is the worst teacher. It gives the test before it gives the lesson." It recounts specific details of Paul's personal life, describing the factors in his background that produced the psychological framework and makeup to which he attributes his lack of success as a trader.

He recounts in detail his entry into the brokerage business, career as an active floor trader on the Chicago Mercantile Exchange and the details of his final downfall and huge loss.

The second section presents the lessons to be learned from his losing experience in the markets. A major theme is that there are many ways to make money in the market but relatively few ways to lose. He attributes most losses of significance to psychological factors.

The third section shows how to avoid losses due to these psychological factors. In practical and easy-to-understand terms, it presents a simple plan to help one understand, accept and, thereby, avoid catastrophic losses. He also emphasizes the value of having a planned, organized approach to trading.

"Participating in the markets without a plan is like ordering from a menu that has no prices, then letting the waiter fill out and sign your charge card receipt. It's like playing roulette without knowing in advance how much you had bet, and only after the wheel stopped, letting the croupier tell you how much you had lost or won."

No sensible individual would behave like this in a restaurant or a casino; yet, there are countless thousands who participate in the market without a concrete plan, the equivalent behavior in the market!

This book is a valuable addition to trading literature. Most traders, even if they have heard or been told that the psychological aspect of trading is the most important, don't take this caveat seriously and opt, instead, to concentrate on timing and selection methods or other techniques that "can't miss". They would be well-advised to obtain this book and study it closely over and over until its valuable message is inculcated into their attitude toward the markets and trading.

Note: I originally wrote a review of this book when it was published in 1994. It was very popular until it went out of print several years ago and became difficult to obtain. Used copies, when occasionally available, commanded high prices and were highly sought after. Tragically, one of the authors, Jim Paul, perished in the attacks on the World Trade Center on September 11, 2001. Co-author Brendan Moynihan recently made arrangements to reprint a limited number of copies of this classic.

More information and full details on this book are available at http://www.traderspress.com