Losing, Losers, and Losses
find a balance between being both humble and confident
G’day guys, gals and galahs. #33 in ya inbox. Big week in learning what not to do! Different week, same spiel, keen to share what I’ve been reading, learning, and compressing. A quote from Lee Kuan Yew to start:
I believe that life is a process of continuous change and a constant struggle to make that change one for the better.
Here’s the format of today’s email:
Part 1: Losing
Part 2: Ikigai for Investing
Part 3: Bonus Quirky Content - Something to Read, Watch, and Listen
Wanted to highlight a couple of losers, losses, and thoughts on losing. Why study the opposite of success? Yen Liow’s thoughts on it:
There’s a very big danger when you only study success because it blinds you to all the counterfactual and seeking dis-confirming evidence is actually one of the most important parts of what we do
Loss and losing is a part of life. A part of investing. And you can’t really escape it. But you can certainly minimise it and learn from it.
Ace Greenberg of Bear Stearns when asked what makes a great trader?
Taking losses. Saying you were wrong. […]
The ability to take a loss and say you were wrong is something you should do.
Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick [Link]
Decent book studying the failures and mistakes of some of the best investors of all time. If you’re an old dog in the investment world, chances are you’ve seen a few of these tales before. But a good chance at studying what went wrong, why it went wrong, and how you can maybe avoid it. Sometimes, you just have to experience the pain yourself!
The best lesson investors can learn from one of the best to ever do it is that there are no good times without the bad times. Big losses are in the fabric of long‐term investing. And if you're not willing to accept them, you will not harvest the long‐term returns that the market has to offer. Munger once said: If you're not willing to react with equanimity to a market price decline of 50 percent or more two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations
What I learned Losing a Million Dollars by Jim Paul [Link]
Paul argues that losses can be categorized as either:
Internal; such as self-control, esteem, love, your mind, or
External; such as a bet, a game or contest, money. External losses are objective and internal losses are subjective.
Some further explanation:
Market losses are external, objective losses. It's only when you internalize the loss that it becomes subjective. This involves your ego and causes you to view it in a negative way, as a failure, something that is wrong or bad. […]
it is easy to equate losing money in the market with being wrong. In doing so, you take what had been a decision about money (external) and make it a matter of reputation and pride (internal). This is how your ego gets involved in the position.
BUT you can have losses and still be right. Similar to what Annie Duke explains about decision making in her book Thinking in Bets. Jim Paul sings a similar tune:
Loss is not the same as wrong, and loss is not necessarily bad. For example, consider exiting a losing position with a small loss, but before the loss got bigger. That was a loss, but it was a good decision. By the same token, a profitable trade based on a tip may be bad because of the dangers of following tips (i.e., the tipster may have incorrect information or he doesn't tell you when to get out).
I read this book a few summers ago and highly recommend it. Similar to Fooled by Randomness by Nassim Taleb.
Acknowledging that losses are part of business is one thing; taking and accepting those losses in the markets is something else entirely.
The Loser’s Game by Charles D. Ellis [Link]
most institutional investment managers continue to believe, or at least say they believe, that they can and soon will again “outperform the market.” They won’t and they can’t.
Oof. Whatta way to start the paper. But first, what’s a Winner’s Game and what’s a Loser’s Game? A winners game would be professional tennis, where to win you need brilliant shots and seemingly miraculous recoveries. A loser’s game might be amateur tennis, where to win you just need to keep the ball in play. Ellis argues that Wall Street used to be a winners game, but has now turned into a loser’s game.
It was a glorious, wonderful, euphoric time [the ‘60s]. It was a time when almost anybody who was smart and willing to work hard could win. And almost all of us did. The trouble with Winner's Games is that they tend to self-destruct because they attract too much attention and too many players – all of whom want to win.
Essentially, the strategy for winning in a loser’s game is to lose less. Don’t be a hero. Stay in your lane. For those wanting to win the Loser’s Game, Ellis lays out some things to consider:
Be sure you are playing your own game. Know your policies very well and play according to them all the time. […]
Keep it simple. Tommy Armour, talking about golf, says "Play the shot you've got the greatest chance of playing well." Ramo says: "Every game boils down to doing the things you do best, and doing them over and over again." […] Why not bring turnover down as a deliberate, conscientious practice? Make fewer and perhaps better investment decisions. Simplify the professional investment management problem. Try to do a few things unusually well.
Concentrate on your defences. Almost all of the information in the investment management business is oriented toward purchase decisions. The competition in making purchase decisions is too good. It's too hard to outperform the other fellow in buying. Concentrate on selling instead. In a Winner's Game, 90 per cent of all research effort should be spent on making purchase decisions; in a Loser's Game, most researchers should spend most of their time making sell decisions. Almost all of the really big trouble that you're going to experience in the next year is in your portfolio right now; if you could reduce some of those really big problems, you might come out the winner in the Loser's Game.
Don't take it personally. Most of the people in the investment business are "winners” who have won all their lives by being bright, articulate, disciplined and willing to work hard. They are so accustomed to succeeding by trying harder and are so used to believing that failure to succeed is the failure's own fault that they may take it personally when they see that the average professionally managed fund cannot keep pace with the market any more than John Henry could beat the steam drill.
Munger with the perfect summary:
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, ‘It’s the strong swimmers who drown.’
Avoid Large Losses
Scott Ramsey in Hedge Fund Market Wizards explains the importance of keeping losses small:
I might lose 10 times on an idea, until the 11th time when it works. If I then get the move I thought I was going to get, it will then more than make up for all the little losses. To me, the most important thing is to control the downside. Rigorous risk control is not only important in keeping losses small, but it also impacts profit potential. You have to put yourself in the position to be able to take advantage of opportunities. The only way you can do that is to have a clear mind. If you have trades that are not working, and your mental energy is going toward damage control, you can’t think clearly about opportunities in the market.
Also, this graphic thanks to @phoenixvalue is great for visualising the uphill battle from copping a large loss.
Basically, the bigger the loss is, the bigger the return needed to get back to even. Similar to making mistakes I guess. Making small and reversible mistakes is fine, even encouraged, I’d argue. But making large, irreversible mistakes can permanently set you back.
Related, Jeff Bezos for decisions uses the thought of one-way or two-way doors. Decisions that are irreversible and highly consequential are one-way doors. They need to be made slowly and carefully. But most decisions aren’t like that. Most decisions are two-way doors.
When there’s a decision that needs to be made, you need to ask, “Is it a one-way door or a two-way door?” If it’s a two-way door, make the decision with a small team or even one high-judgment individual. Make the decision. If it’s wrong, it’s wrong. You’ll change it. But if it’s a one-way door, analyze it five different ways.1
In general, failure, copping losses, and being a ‘loser’ isn’t all negative. Bill Ackman put it best:
How successful you are is a function of how you deal with failure. If you deal with failure well and persist, you have a higher probability of being successful.
Financially, I think the key with failure is to ensure it doesn’t wipe you out so you can keep playing the game until the cards fall in your favour.
How to Win the Loser's Game [80 mins]
What I Learned from Losing $200 Million
Only by managing that monstrosity through the crisis did I come to fully appreciate […] no matter how hard I worked or how much I prepared, there would always be some things I couldn’t completely fathom.
Ikigai for Investing
Doesn’t really fit anywhere but wanted to include it. Made this graphic the other week based on @NeckarValue’s thoughts so thought it’d worthwhile sharing here.
Bonus Quirky Content
Something to read: The Best Way to Consume Information [Link]
We have access to more information than anytime before in history. But how to sift through it all? What’s worth consuming and what isn’t? It’s simple. Focus on the information with the longest shelf life that took a considerable effort to create.
The Power Broker by Robert Caro took 7 years to write and can be purchased for $23.40 on Amazon. If you assume he worked full-time while writing it, then it would cost you less than 1/5th of a cent per hour of Caro’s time.
The amount of effort compared to the price you pay is astounding.
Something to watch: Carlos Ghosn: the rise and fall of a superstar CEO [22 mins]
The story of Carlos Ghosn is wild from start to finish. At the bare minimum, skip to 13:10 in the video and see how his escape from Japan unfolded. Bonkers.
Also, I recommend this video from Bloomberg detailing his escape.
Something to watch: Sole Tradition: Yamaguchi Taro [6 mins]
Just a neat mini doco on a cobbler in Singapore.
There’s all kinds of people in society.
Don’t let their views be a bother.
We just carry on doing our own thing. Focus on one thing at a time.
Something to listen to: Eric C. Rath, "Oishii: The History of Sushi" [Link] [Apple Link]
I love podcasts like these. Just a deep dive into the history of sushi and how it came to be. Love the fact that Eric is willing to say he doesn’t know (or impossible to know) about some origins of sushi and is able to live with that. Now to read the book!
Something to listen to (from me): Andy Ho on Compounding Curiosity [Link] [Apple Link]
Andy was a joy to interview, and his optimism and thirst for knowledge is infectious. And super knowledgeable about Vietnam to boot! How good is this! Beyond stoked
I’m excited about many things about Vietnam in terms of investment. But I think by and large we do like to focus on sectors and companies in those sectors that contribute to the growth or part of the growth of the domestic economy.
You have a population that’s almost a 100 million people, and the GDP per capita is about two and a half to three and a half thousand. So it’s on the lower side. And so you can see that if all goes well, these people are going to get wealthier and wealthier on the average, about five to 10% wealthier each year. Because as GDP grows, they get wealthier. And they’re going to spend money.
Rabbit hole/resource to dive into: Jeff Nippard’s YouTube Channel [Link]
Recently got serious about the gym again and Jeff’s channel is a gold mine for those in bulking szn. Brains and brawn. We’re all gonna make it brah.
Bonus investing links that don’t fit anywhere else:
The Raw Material of Long Term Investing: How I Build Conviction to Sleep Well at Night by @SleepwellCap
"You have to find a balance between being both humble and confident. In other words, you must be able to deal with mistakes and willing to look wrong."
The Distillation of Yen Liow by @SeanDeLaney23
"You find your why, you work out your how. You choose a game wisely that you find fulfilling. Don’t just choose success, seek fulfillment. Learn to lead yourself and then others. Surround yourself with peers you admire and respect. Acquire mentors who show you the path or assist you, and then learn like crazy, work like crazy, and win like crazy. I hope you embrace and enjoy the struggle that is the journey of excellence."
Final thought for the week:
Until next Wednesday, have a ripper!
- The Real Slim Scarrott
You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com, interviewing legends at Compounding Curiosity, and on Twitter @scarrottkalani.
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