The book recounts the lessons learnt by Jim Paul, a futures trader in the US, who personally lost over $1m in the space of three months trading in soybean oil futures. It is two stories in one: the first is a brief history of the author and how he became, what I could only class as, an arrogant stockbroker dealing in the futures market. The second half of the book outlines the lessons learnt from losing $1m in 1983 and reflecting upon the psychological behaviour of an investor.
If all there was to this book was its second half, I think most readers would have probably given up reading within the first 20 pages, but the hook comes from the experience gained in the first half of the book when you are willing the cocky American to come a cropper.
Be aware that it is an American publication and the events of his downfall occurred before modern-day computerised trading was the norm, but the lessons still apply today – particularly when you look at some of the high-profile losses made by some traders over the last 10 years.
Despite computerisation, there is still some human input into trading today and investment managers, including portfolio managers, can become emotionally attached to some of their holdings. Just how an investor, including IFAs who run client portfolios, are supposed to judge these psychological attachments are well set out through the second half of the book.
It tells the reader that it is experience and time that will best serve how to judge the success of a manager. Every investor has to experience some losses, as it is the losses and not the gains that make good investment managers.
The book points out very early that many successful investors have opposing styles and theories on how to make money, and that they can not all be right at the same time. The most important point to take from the book is how to avoid losing money, as this is what is most evident when you study the successful investors, but first they need to experience a loss that teaches them the lesson.
Warren Buffett’s two rules of investing are noted at the end of the first section:
- Rule 1: Never lose money.
- Rule 2: Never forget Rule 1.
I think it is safe to say we have all broken Rule 1 at some point, but the book points out some specifics that should help any investor to limit the number of times you break the first rule and, if you do break it, you need to limit how much you break it.
Published by Columbia University Press
