What I Learned Losing a Million Dollars
Page 18
In all risk taking — Speculation, business ventures, entrepreneurial activities — it is the loss side on which you must focus first. (This is even true for gambling — the gambler determines how much he’s willing to bet, and lose, before the game is played. He doesn’t wait for the game to end and then let the croupier or dealer assign his wager for him.) How do you determine the downside, and how do you control or minimize it? With objective decision-making and a plan which has as its starting point the stop-loss parameters. Rather than looking for a formula for success to follow, this book has identified the formula for failure to avoid. As An Wang, founder of Wang Laboratories, said “. . . it is my belief that there are no ‘secrets’ to success.”84 The formula for failure is not lack of knowledge, brains, skill or hard work, and it’s not lack of luck; it’s personalizing losses, especially if preceded by a string of wins or profits; it’s refusing to acknowledge and accept the reality of a loss when it starts to occur, because to do so would reflect negatively on you.
Appendix
Jim Rogers formed one-half (George Soros was the other half) of the phenomenally successful Soros Fund. During his tenure, 1969–1980, the fund was up 3365% vs. the S&P composite’s gain of 47%.
Marty Schwartz is an independent professional trader. He attained a degree of fame from his performance in the U.S. Trading Championships. He entered ten four month contests and in nine of those contests (in one contest he broke even) he has made more money than all the other contestants combined, averaging 210% non-annualized return.
John Templeton is the dean of global investing. His investing record shows that for thirty-one years his performance has averaged an annual increases of 15%, versus 7% for the Standard & Poor’s Index. He managed $6 billion for the Templeton Funds before “retiring.”
William O’Neil started in the securities business in 1958 as a stock broker. During 1962–63, he pyramided $5,000 into $200,000 in three back-to-back trades. Eventually he launched Investors Business Daily newspaper. Over the past ten years, his investments have averaged a 40% annual return.
Warren Buffett started Buffett partnership at the age of 25 with $100,000. In 1969 when he liquidated the partnership at the speculative market peak, it had grown to $100,000,000. Buffett’s take — $25,000,000. His investors earned 30 times their original investment. Today he runs Berkshire Hathaway and his investors continue to benefit from his stellar performance. His personal investing success is evidenced by his inclusion in the Forbes 400 with a personal net worth of $1 billion.
Peter Lynch ran Fidelity Management’s Magellan Fund, the largest mutual fund in history, from 1977 to 1990. Before retiring in January, 1990, Lynch was one of the highest paid portfolio investment employees in the world. $10,000 placed with Lynch in 1977 when he took over management of the fund grew to $200,000 in 1988.
Paul Tudor Jones earned over a million dollars in commissions in his second year in the business as a commodity broker. In 1980 he switched to the floor of the New York Cotton Exchange and made millions during the next few years. As Chairman of Tudor Investments, each $1,000 invested with him in 1984 had grown to more than $17,000 by 1988.
Michael Steinhardt has one of the best 20 year track records in investment history. $10,000 put in his hedge fund at its 1967 inception grew to over $1,000,000 20 years later, achieving a compounded annual growth rate of 30%. Over the same period, $10,000 invested in the Standard & Poor’s 500 Index grew to only $64,000.
Roy Neuberger is Chairman of Neuberger-Berman & Company. He started as a runner on Wall Street in 1929 and when he began investing his own money a few years later, he took $30,000 to several hundred million.
Bernard Baruch had made $3,000,000 on Wall Street by the time he was thirty-two years old — and this was in the 1920’s and 1930’s. He made a million in the stock market and put it at risk to earn a second million and so on until he amassed $25,000,000.
W. D. Gann was one of the most successful commodity and stock traders in the 1920’s and 1930’s — if not all time. An analysis of his trading record over 25 market days revealed that he made 286 trades, 264 of which were profitable. During that period, he turned $450 into $37,000.
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Notes
[←1]
“The Five Deadly Business Sins,” The Wall Street Journal, October 21, 1993, p. A–18.
[←2]
An Wang, Lessons (Addison Wesley, Reading MA, 1986), p. 1.
[←3]
Herb Kelleher, Television advertisement for American Express, Olgivy & Mather, 1993.
[←4]
Jack Schwager, Market Wizards (New York: The New York Institute of Finance, 1989), p. 317.
[←5]
Ibid., p. 265.
[←6]
Madelon DeVoe Talley, The Passionate Investors (New York: Crown Publishing, 1987), pp. 70–72.
[←7]
Schwager, p. 229.
[←8]
DeVoe Talley, pp. 75–78.
[←9]
Ibid., p. 110.
[←10]
Schwager, p. 232.
[←11]
DeVoe Talley, p. 110.
[←12]
Ibid., p. 29.
[←13]
Schwager, pp. 314–15.
[←14]
Ibid., p. 129.
[←15]
DeVoe Talley, p. 52.
[←16]
Schwager, p. 291.
[←17]
Ibid., p. 197.
[←18]
W.D. Gann, How to Make Profits in Commodities (Pomeroy, Washington: Lambert-Gann Publishing, 1951), p. 18.
[←19]
John Train, The New Money Masters (New York: Harper Row, 1989), p. 22.
[←20]
Schwager, pp. 276 & 279.
[←21]
Schwager, pp. 126 & 136.
[←22]
“Where’s the Buffet?: I Missed Warren At His Favorite Steakhouse,” Money, August 1991, p. 72.
[←23]
Schwager, p. 233.
[←24]
DeVoe Talley, p. 29.
[←25]
Edward 0. Thorp, Beat The Dealer (New York: Vintage Books, 1966), p. 182.
[←26]
Peter Drucker, Management (New York: Harper Row, 1985), p. 512.
[←27]
“Confessions Of A Compulsive High-Roller,” Business Week, July 29, 1991, p. 7
8.
[←28]
Richard A. Epstein, The Theory of Gambling and Statistical Logic (New York: Academic Press, 1977), pp. 393–4.
[←29]
Ludwig von Mises, Human Action (Chicago: Contemporary Books, 1966), p. 116.
[←30]
Gustave Le Bon, The Crowd (New York: The Macmillan Co.).
[←31]
Charles P. Kindleberger, Manias, Panics & Crashes: A History of Financial Crises (New York: Basic Books, 1989) pp. 17–18.
[←32]
Le Bon, pp. 2–3.
[←33]
Humphrey Neil, The Art of Contrary Thinking (Caldwell, Idaho: The Caxton Printers, Ltd., 1954), p. 137.
[←34]
Ibid., pp. 8–10.
[←35]
Irving L. Janus, Victims of Groupthink (Boston: Houghton Mifflin Co., 1972), p. 87.
[←36]
Neil, p. 134.
[←37]
James Grant, Testimony before the House Banking Committee, July 30, 1992.
[←38]
Henry Hazlitt, The Failure of “The New Economics” (Lanham, Maryland: University Press of America, 1983), p. 183.
[←39]
von Mises, pp. 112–13.
[←40]
Ibid., p. 112.
[←41]
“No Single Regulator For Banks,” The Wall Street Journal, December 15, 1993, p. A–12.
[←42]
Drucker, p. 479.
[←43]
Drucker, p. 499.
[←44]
Ibid., p. 126.
[←45]
Daniel Yergin and Thane Gustafson, Russia 2010: And What it Means for the World (New York: Random House, 1993), p. 8.
[←46]
Ibid., p. 11.
[←47]
Ibid.
[←48]
Ibid., p. 9.
[←49]
Ibid., p. 12.
[←50]
“The Man With The Midas Touch Meets His Match in the Nation’s Steakhouses,” The Wall Street Journal, January 3, 1994, p. A–9.
[←51]
von Mises, p. 116.
[←52]
“Die and Let Live,” North Texas Public Broadcasting. Written and produced by Shelia Coope, 1993.
[←53]
Edward de Bono, Teaching Thinking (New York: Penguin Books, 1991), pp. 72–73.
[←54]
Nathaniel Branden, The Psychology of Self-Esteem (New York: Bantam, 1971), p. 126.
[←55]
NBC Nightly News, September 27, 1993.
[←56]
NBC Nightly News, October 11, 1993.
[←57]
Richard E. Neustadt and Ernest R. May, Thinking In Time (New York: Macmillan, Inc., 1986), p. 137.
[←58]
Ibid., p. 136.
[←59]
Ibid., p. 81.
[←60]
Ibid., p. 170.
[←61]
Ibid., p. 79.
[←62]
Ibid., p. 89.
[←63]
“How Morgan Stanley Maps Its Moves,” Institutional Investor, June 1992, p. 53.
[←64]
Ibid., p. 52.
[←65]
Ibid.
[←66]
Howard Banks, The Rise and Fall of Freddie Laker (London: Faber and Faber, Ltd., 1982) pp. 9–10 and 105–107.
[←67]
“Steve Jobs’s Vision, So Right at Apple, Now is Falling Short: Deep Faith in His Own Genius,” The Wall Street Journal, May 25, 1993, p. A–1.
[←68]
“Roy Raymond’s Life and Death Yield Grim Case Study: Suicide of Founder of Victoria’s Secret Followed Failure to Regain Glory,” The Wall Street Journal, September 29, 1993, p. B–2.
[←69]
Mark Pendergrast, For God, Country and Coca-Cola (New York: The Macmillan Co.) p. 342.
[←70]
Ibid., p. 347.
[←71]
Ibid., p. 350.
[←72]
Ibid., p. 351.
[←73]
Ibid., p. 353.
[←74]
Ibid., p. 359.
[←75]
Ibid., p. 355.
[←76]
“Sahlman Says,” The Wall Street Journal, October 15, 1993, p. R–21.
[←77]
“What Makes a Good Salesman,” Harvard Business Review, Business Classics: Fifteen Key Concepts for Managerial Success, pp. 52–53.
[←78]
“Escalation Errors and the Sunk Cost Effect: An Explanation Based on Reputation and Information Asymmetries,” Journal of Accounting Research, Vol. 27, 1989, pp. 59–77.
[←79]
“Just What Is An Entrepreneur?” Business Week, Bonus Issue: Enterprise, October 1993, pp. 105–106.
[←80]
“Would You Believe It? Craig McCaw Says He Is Risk Averse,” Forbes, March 1, 1993, p. 79.
[←81]
Ibid., p. 80.
[←82]
Ed Zschau, Book review of “Steve Jobs and the NeXT Big Thing,” by Randall E. Stross, The Wall Street Journal, December 10, 1993, p. A–12.
[←83]
“Talented Outcasts: Bear Steams Prospers Hiring Daring Traders That Rival Firms Shun,” The Wall Street Journal, November 11, 1993, p. A–6.
[←84]
An Wang, Lessons (Reading, Maryland: Addison Wesley, 1986), p. 1.