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FOREWORD
Jack Schwager
FOREWORD
lot easier than it is. The potential for even temporary success doesn’t
exist in any other profession. If you have never trained as a surgeon,
the probability of your performing successful brain surgery is zero.
If you have never picked up a violin, your chances of playing success-
ful solo violin in front of the New York Philharmonic are zero. It is
just that trading has this quirk that allows some people to be suc-
cessful temporarily without true skill or an edge—and that fools
people into mistaking luck for skill.
Jim Paul thought that his early success in the markets was caused
by his being smart or maybe by his willingness to break the rules. He
didn’t realize that his heady run was based on luck until he had lost
all his profits and a good deal more. And Paul would be the first to
admit that his winning streak was a matter of luck even though it
lasted for years. This conclusion is unavoidable because his defi-
ciency as a trader made a total loss inevitable. As he readily acknowl-
edges, even if had not lost all his money when he did, it would merely
have postponed this ultimate outcome, perhaps to a point in time
when his loss would have been that much greater.
The truth is that trading, both successful and unsuccessful, is
more about psychology than tactics. As Jim Paul ultimately learns
through a very expensive lesson taught by the market, successful
trading is not about discovering a great strategy for making money
but rather a matter of learning how to lose. From the research he
conducts following his catastrophic experience in the markets, Paul
realizes that winning traders differ radically, using approaches that
often contradict one another. What winning traders share, however,
is that they all understand that losing is part of the game, and they all
have learned how to lose. By losing everything, Paul becomes an ex-
pert on losing, and it is only then that he can become a winning
trader rather than a temporarily lucky one.
There is more to be learned from Jim Paul’s true story of failure
than from a stack of books promising to reveal the secret formula for
success. Not only that: What I Learned Losing a Million Dollars is a
much more entertaining read. Although the book can be read simply
as a humorous and breezy tale, readers should not lose sight of the
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FOREWORD
fact that this compact volume is filled with a wealth of trading wis-
dom and insights. It cost Paul a fortune to learn these lessons; the
reader has the opportunity to benefit from this knowledge for the
mere cost of a book—a true bargain.
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PREFACE TO THE
COLUMBIA EDITION
Since this book was first published, nearly twenty years ago, a lot has
changed in the world of trading. Open outcry is nearly dead, exchanges
have merged, and newfangled instruments have been created—some
of which generated losses that brought the global financial market to
its knees.
One thing that has not changed over the past twenty years is the
decision-making mistakes that traders and investors make in the mar-
kets. Whether you are a professional managing other people’s money
or an individual managing your own money, you are susceptible to
these mistakes—if not on the same scale of operations. Since the
book’s first printing, we have witnessed some colossal risk-manage-
ment disasters. For example, Nick Leeson of Barings Bank lost 827 mil-
lion pounds ($1.4 billion) in 1995 betting on the Japanese stock market.
Toshihide Iguchi of Daiwa Bank lost $1.1 billion the same year. Yasuo
Haminaka, a.k.a. Mr. Copper, of Sumitomo lost $2.6 billion trading
copper in 1996. Then there was John Rusnak at Allfirst Bank, who lost
$691 million in 2002 trading currencies. Chen Juilin of China Aviation
Oil Corporation lost $550 million in 2005 trading jet-fuel futures (It
was a spectacular fall from grace for the “King of Aviation Oil.”) And
Jerome Kerviel of Societe Generale dropped a stunning 4.9 billion eu-
ros ($7.4 billion) between 2006 and 2008 in equity derivatives.
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PREFACE
nothing and in fifteen years had built the largest and most profitable
manufacturing firm on the planet. Yet a few years later, this seem-
ingly impregnable business empire was in shambles and would go on
to lose money almost every year for the next two decades. Ford was
known to stick uncompromisingly to his opinions; is it possible his
company lost so much money because he took the successes person-
ally and came to think he could do no wrong?
Personalizing successes sets people up for disastrous failure.
They begin to treat the successes totally as a personal reflection of
their abilities rather than the result of capitalizing on a good oppor-
tunity, being at the right place at the right time, or even being just
plain lucky. They think their mere involvement in an undertaking
guarantees success.
This phenomenon has been called many things: hubris, overconfi-
dence, arrogance. But the way in which successes become personal-
ized and the processes that precipitate the subsequent failure have
never been clearly spelled out. That is what we have set out to do.
This book is a case study of the classic tale of countless entrepre-
neurs: the risk taker who sees an opportunity, the idea that clicks,
the intoxicating growth, the errors, and the collapse. Our case is that
of a trader, but as with all case studies and parables the lessons can
be applied to a great many other situations. These lessons will help
you whether you are in the markets or in business. The two areas
have more in common than one might suppose. Warren Buffettt, the
richest man in America, is quoted on the cover of Forbes’s 1993 edi-
tion of the “400 Richest People in America”: “I am a better investor
because I am a businessman, and I’m a better businessman because
I’m an investor.” If the elements of success can be transferred be-
tween the markets and business, the elements of failure can too.
We could study a hypothetical series of successes to demonstrate
how success becomes personalized and then how a loss follows, but
you are more likely to remember and learn the lessons if they are pre-
sented in anecdotes about a real person and a really big loss. How big?
The collapse of a fifteen-year career and the loss of over one million
dollars in a mere seventy-five days.
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Brendan Moynihan
Nashville, TN
May 1994
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