Guru Ratings
Jim Paul
Meh.
Remember my ratings criteria. I’m not judging these gurus on “global” or moral values, but very specific criteria. Many of my favorite books would be rated “bad” by my criteria for self-help (probably, because they are not self-help books). My ratings don’t reflect how well an author met his own goals, but how well they met my criteria for useful, accurate self-help.
What I Learned Losing a Million Dollars (1994)
Some people write to impress you. Jim Paul writes like he talks. His book is fun to read.
Learn the rules, play the game
Paul tells how he succeeded at almost everything he did. To him, every challenge was a game. All he had to do was learn the rules, play by the rules, and he won. It was simple.
For example, Paul needed to learn the trading floor. So he found the best trader there and said, “Stu, can I take you to lunch?”
“I don’t go to lunch.”
“Can I take you to dinner? Can I take you for a drink? Look, you can call it anything you want, I just want to go out and talk with you. You’re the best trader in the pit so you’re the man I gotta talk to.”
“Okay, we’ll go to lunch.”
Everything was that simple for Paul. He succeeded at everything. He made a million dollars. And then he lost it all.
The most important thing: don’t lose money
Success had gone to his head. Paul thought he couldn’t lose. That’s why he stayed in when he should have gotten out. Looking back, he realized his success had mostly come from luck and knowing the right people. He wasn’t even a good trader.
To start over, he studied how to make money. He studied the pros. Peter Lynch. Bernard Baruch. Jim Rogers. Paul Tudor Jones.
Problem was, they all said different things.
Jim Rogers: “I haven’t met a rich technician.”
Marty Schwartz: “I used fundamentals for 9 years and then got rich as a technician.”
John Templeton: “Diversify your investments.”
Warren Buffet: “Concentrate your investments.”
Bernard Baruch: “Don’t try to buy at the bottom or sell at the top.”
Paul Tudor Jones: “Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops.”
The experts had made money in opposite ways. How was a guy supposed to get rich? Maybe losses held the key.
- Jim Rogers: “My basic advice is don’t lose money.”
- Marty Schwartz: “The most important thing in making money is not letting your losses get out of hand.”
- Paul Tudor Jones: “Don’t focus on making money; focus on protecting what you have.”
- Warren Buffer: “Two rules of investing: (1) Never lose money. (2) Never forget rule #1.”
The pros made money in contradictory ways because they all knew how to control their losses. The secret to getting rich wasn’t making money a special way, but not losing it.
How to not lose money
At this point, Paul suddenly becomes less readable:
Investing is parting with capital in the expectation of safety of principal and an adequate return on the capital in the form of dividents, interest or rent. Since the return on capital takes the form of periodic payments of interest or dividends, investing indicates an intention to be separated from the capital for an extended period of time.
That’s too bad. But I will give you his main points in plain talk.
People lose money for psychological reasons, not analytic ones. In investing, we all have the same analytic tools. It’s an efficient market. We lose big money when our emotions and egos start making decisions for us.
Don’t make it personal. Markets go up and down. We can’t predict them. All we can do is look at the data and make our best guess.
When your market goes down, don’t make it personal. Don’t deny it: “No way! Are you sure that’s not a misprint?” Don’t get depressed. Don’t say, “I can’t get out here; I’m losing too much.” Just look at the data and decide what to do as if you’d just joined the market that morning.
Don’t make it personal when your market goes up, either. Don’t say, “I knew it! I’m so good at this.” Just look at the data and decide what to do. If you start thinking you’re too good to fail, then you won’t accept it when you do start failing, and you’ll lose a million dollars like Jim Paul.
Make a plan. One way to beat your ego and emotions is to decide in advance what you’re going to do. So:
- Decide what your goals are.
- Select analytic tools.
- Develop your rules for investing.
- Set up controls.
- Write your plan down.
Don’t be ruled by the crowd. Don’t run with the crowd. But don’t do the opposite of the crowd, either. Both can lead to trouble. Instead, just look at the data and make your decision. Neutralize your emotions however you can.
Avoid common psychological mistakes:
- Don’t overvalue wagers involving unlikely but high gain, like betting on long shots at the race track.
- Don’t undervalue wagers involving likely but low gain.
- Remember that every throw of the die is independent. If you’ve rolled a six 20 times in a row, a six is just as likely on roll 21 as it ever was.
- Don’t overestimate unusual streaks or underestimate short runs.
My conclusion
Jim Paul tells a good story. When it comes to specific advice, he’s not quite so good.
But his book has solid perspective. In particular, take two things from the book:
- Not losing money may be more important than how you make it.
- Don’t personalize your successes or failures. Don’t submit to emotions or the crowd. Just look at the data and make a decision.