What I learned losing million dollar

• Intro
• Success can be built upon repeated failures when the failures aren’t taken personally; failures are built upon repeated success when success are taken personally.
• Personalizing success sets people for disaster failure. They treat it as a personal reflection of their abilities rather than the result of capitalizing on good opportunity, being at the right place at the right time, or even just lucky.
• Rise sets up the fall; the winning sets up the loss. You cant really be set up for disaster without having it preceded by success
• Ducker said-”success always obsoletes the behavior that achieved it”
• you can either play the system or you can let system play you. If you let system play you , you can get very frustrated and very beat up.
• The most important part in investing is- “ concerned about controlling the downside. Learn to take the loss. The most important thing in making money is not letting your losses get out of hand.
• Losing money in market is result of either- 1 ) some fault in analysis 2)some fault in application.
• Psychological Dynamic of Loss
• Market losses are objective . It is fact, you cant deny it. It is only when you internalize the loss then it becomes subjective(it differs from one person to another). The trick is to find out gap in your process and focus on filling it by more learning or thoughtful observation.
• The key to understanding how external loss becomes internalized lies in knowing the subtle difference between facts and opinions. Opinions are personal assessments & can be right or wrong; facts cannot.
• Participating in the market is not about being right or wrong, nor it is about defeat, it is about making decisions.
• Decision-making is a process of reaching conclusion after careful consideration; it is a judgement; a choice between alternatives when all the facts are not yet & cannot yet be known because they depend on events unfolding in the future.
• An example of personalizing market position is peoples tendency to exit the profitable position and keep unprofitable positions
• 5 stages of internalizing the loss

1. Denial- you deny that I made a wrong bet
2. Anger
3. Bargaining- on facing loss, all you want is to get back to where you were before and this prompts to hold onto loss and as it gets bigger , it becomes too big loss to handle.
4. the depression-pervasive feeling of sadness
5. acceptance-it is void of any feeling and is marked by resignation.

• The market is a continuous process — an activity that has no clearly defined end. Losses from continuous process are more prone to become internalized because like all internalized loss,there is no predefined end points. Nothing forces you to acknowledge it as loss; there is just you, your money, and the market as a silent thieves.
• As long as your money holds out, you can continue to kid yourself that the position is a winner that just hasn’t gone your way yet.
• The psychological fallacy of Risk
• Risk is defined as the possibility of suffering a loss
• Most people who think that they are investing are speculating and most people who think they are speculating are gambling.
• The market and gambling are somewhat similar in subject to loss. The big difference is gambling creates risk while investing/speculating manages risk that already exists.
• The risk involved are- internal risk and created risk-arbitrary invention of potential monetary loss which could have been avoided.
• 5 activities

1. Investing- the safety of capital and adequate return over a long period of time.
2. Trading- taking advantage of volatility and extract bid-ask spread from the market.
3. speculating- Buying for resale. Doesn’t anticipate return in form of dividend or interest payment, because the time period is short.
4. Betting-Agreement between 2 parties to prove them right or wrong
5. Gambling-derivative of betting. To gamble is to wager money on the outcome of the game, contest etc. The immediate aim of gambling is entertainment and to escape the humdrum of life. Gambling deals with the unknown, with pure chances.

• Psychological Fallacy
• Tendency to overvalue wager involving the low probability of high gain and to underestimate high probability of low gain.
• To interpret the probability of a successive independent event as additive rather than multiplicative(power of compounding).
• The perception that the psychological probability of the occurrence of an event exceeds the mathematical probability if the events are favorable and vice versa.
• People tendency to overestimate the frequency of infrequent event and underestimate the comparatively frequent ones.
• Peoples tendency to confuse the occurrence of an unusual event with the occurrence of low probability event.
• Psychological crowd
• Man is extremely uncomfortable with uncertainty. To deal with discomfort, man tends to create a false sense of security by substituting certainty for uncertainty.
• The most frequently cited reason for the loss in the market is emotion- emotions are strong feeling arising subjectively rather than through conscious mental effort.
• If you don’t have conscious control of your actions, then your emotions have control of you.
• The basic distinction between individual and crowd- individual acts after reasoning, deliberation and analysis; a crowd acts on feeling, emotion and impulses.
• characteristic of crowd

1. A sentiment of invincible power-In a crowd, people do things they wouldn’t do ordinarily do because they are anonymous and feed off the power provided by the crowd.
2. The responsibility that keeps individual in control vanishes in-crowd.
3. Contagion-Tendency to spread as an emotional or emotional state.
4. a person in a crowd commits an act contrary to his obvious interest.
5. Tenacity with which member addresses erroneous assumptions despite mounting evidence to challenge them.

• 2 psychological crowd models in market

1

• Expectant attention- he is anxious to make money
• suggestion made- he hears tip
• contagion- enthusiasm is contagious and he goes into hypnotic like trance
• acceptance- take tip as gospel and acts on it.

2 illusion model

• Affirmation- an opinion about market is expressed by you.
• repetition- it gets repeated to others
• prestige- Domination exercised over us by an individual
• contagion- the market is going your way, you have the adulations of the peers. Emotionalism overwhelms you. You are hypnotised.
• Hope/fear paradox-
• crowd and fear are the 2 driving emotions of market participants
• “ crowd is most enthusiastic and optimistic when it should be cautious and prudent , & it is most fearful when it is bold.
• Mania/Panic
• when hope and fear meet the crowd
• Man is extremely uncomfortable with uncertainty, tries to substitute certainty for uncertainty, & in doing so succumbs to herd instinct.
• When the herd instinct combines with hope and fear in a market , we get panics and mainas
• By avoiding the symptoms which accompany becoming part of a crowd , you will automatically avoid emotionalism.
• Rules, tools, and fools
• Dealing with the uncertainty of future, we have 3 choices

1. Engineering-he builds safety of margin in his calculation to eliminate any fringes of uncertainty
2. Gambler- he is betting without knowing of the probability of being correct. The gambler plays for excitement adrenaline.
3. Speculator- knows more than gambler ,it has atleast some knowledge of what determines the outcome of his activity.

• Decision taking-
• you must decide the condition under which you will enter the market before developing the plan to implement the decision.
• Decision-making process is as follows

1. Decide what type of participant you are going to be.
2. select a method of analysis
3. develop rules- read books, observe, do homework
4. establish controls- define entry and exit criteria. It should be consistent with strategy.
5. formulate a plan.

The plan you develop must be consistent with the characteristics and time horizon of type of partcipant you chose to be.

• A poor entry point could increase losses or reduce profit . But not having pre- determined stop loss can and ultimately will cost you lot of money.
• when you

1. internalize the loss because you don’t want to lose the face
2. Bet or gamble on the position because you want to be right
3. Make crowd trades because you are making emotional decisions

you will lose more money than you can afford.

• Always have scenario planning- structured discipline method for thinking about the future and technique for anticipating developments in fluid political and economic situations.
• Pre-occupation with wanting to be right means you are betting, which personalizes the market & is the root cause of losses due to psychological factors.
• knowing the losses ahead of time reduces the uncertainty factor to nil, because you have acknowledged and accepted the amount of potential losses before it occurs.
• More the market treated as game, less likely you are to lose. why? Games have rules and defined ending points.
• A plan takes the positive attributes of games & applies to the market , giving you the structure necessary to create a discrete event.
• Having a plan requires thinking , which only an individual can do- not a crowd. A crowd cannot think any more than it can eat or drink.
• Following a plan impose a decision on your emotions. If you dont have discipline to follow the plan, your emotions have taken control and you wind up in the crowd.
• Participating in market is not about egos & being right or wrong & it is not about entertainment. The minute it starts getting exciting, you are gambling.
• The only way to combat falling in the opinion trap- is to think before you answer.
• Your self image should not be function of what you have accomplished — but how you have gone about doint it.
• Implement the plan via rule and then follow the rules.
• Without a plan your losses grow while you are being pushed or pulled around by price movements.
• If you drop your discipline and try bluffing, you are exposing yourself to losing all of your money.
• To bluff means to intimidate by showing more confidence than facts support.
• If you don’t know what is making profitable trade profitable- you wont know what to repeat in order to repeat the profits.
• If you deviate from your plans, you are playing with a lighted fuse. The bomb may not go off in a particular battle , but before war is over , the bomb will explode in your face.