TWI #47 - Stop Doing This

Read Time: 4 min 

Read online at TheArtofTradingworkshop.com

Welcome to The Weekend Investor, a weekly newsletter where I provide actionable ideas to help you build a wealthier, healthier, and happier even if you don't have much time. 

Today at a glance: 

• Getting Wealthy vs Staying Wealthy - What Jessie Livermore’s story teaches us

• The Parable of Two Arrows - Hint, its the second one that’s the killer

• Turning Losses into Motivation - How losses work geometrically against you

• Thriving with a Survival Mindset - Framework for Investment Survival

Getting Wealthy vs Staying Wealthy

Not So Contrasting Fortunes: Jesse Livermore and Abraham Germansky

Jesse Livermore, an early 20th-century stock market trader, was born in 1877 and became a trading pioneer.

By age 30, he was incredibly wealthy, with a net worth equivalent to $100 million today.

In 1929, he gained immense fame as a successful investor, but the stock market crash that year resulted in substantial losses for many.

However, Livermore, through a fortunate short position, made a staggering profit of over $3 billion in a single day, becoming one of the richest individuals globally.

On the other hand, Abraham Germansky, a prosperous real estate developer, thrived during the 1920s boom.

He heavily invested in the surging stock market, hoping for continued success. Sadly, the crash of 1929 had devastating consequences for him.

Germansky's life took a tragic turn, and he disappeared, with the last sighting indicating his distressing actions near Wall Street.

Four years later, Livermore's initial success led to overconfidence, larger bets, and mounting debt.

Ultimately, he lost everything and tragically took his own life. Germansky and Livermore shared a trait – they excelled at accumulating wealth but struggled to maintain it.

Their stories emphasize a critical lesson: acquiring money is just one aspect; preserving and growing it require a different skill set.

"Good investing is not necessarily about making good decisions, it's about consistently not screwing up." 

- Morgan Housel 

The Parable of Two Arrows

Imagine walking through a serene forest, enjoying the tranquility, when suddenly an arrow strikes your arm.

The pain is intense, sharp, and real. But then, something else happens. Your mind begins to race with thoughts of fear and worry.

What if this gets worse? What if I can't get back to safety? What about my loved ones?

The pain, though physical, is now accompanied by mental anguish, like a second arrow hitting you.

This story comes from Buddhism, used to teach mindfulness and psychological flexibility.

The first arrow is the pain you feel, while the second arrow is the suffering caused by your mind's reaction to that pain.

The Buddha's message: Beware of the second arrow.

The first arrow is unavoidable, but the second is a choice.

Visualization by Behavior Gap

Turning Losses into Motivation

When you experience a financial loss in the stock market, it's not just about the money you've lost; it's about the extra effort you'll need to put in to recover.

Imagine it like this: losses work against you in a powerful way. If a stock's price drops by 50%, say from $28 to $14, you'd need a whopping 100% increase (from $14 back to $28) just to break even.

Yes, a 50% loss demands a 100% gain to get back on track – that's a fact worth remembering.

But hold on, there's an important strategy here.

If you manage to keep your losses small, the game changes.

A 10% loss, for instance, only requires an 11% gain to even out the balance, and a 5% loss can be mended with just a 5.26% gain.

This is why avoiding significant losses is crucial.

You see, if you suffer a major hit in your account, your ability to make profitable investments diminishes significantly.

Imagine holding onto a small amount while searching for that big opportunity – it's not the ideal scenario.

Here's the secret: minimize your losses to protect your hard-earned money for future ventures.

The key lesson is to never let a loss be so substantial that it endangers your account.

Recovering from bigger losses is incredibly challenging, so set a strict limit, perhaps 10% on the downside, as your safety net.

Perhaps your selection criteria, timing, or even the market conditions need adjustment.

Remember, turning small losses into minor setbacks empowers you to make smarter decisions for a prosperous trading journey.

Check out My Previous Newsletter for More on How this Works.

Why Losses Matter More Than Profits (theartoftradingworkshop.com)

Thriving with a Survival Mindset - Framework for Preventing Large Losses 

When it comes to applying the survival mindset to real life, there are three essential insights that can make a world of difference.

1. Resilience Over High Returns:

Instead of chasing only big returns, focus on becoming financially resilient.

Remember, compounding doesn't demand sky-high returns; it thrives on steady, consistent growth.

2. Embrace Uncertainty with a Flexible Plan:

Planning is important, but a plan's true test lies in its adaptability when things go awry.

As they say, you plan, and life laughs. Financial and investment plans are crucial for gauging your current actions against reason.

Yet, the past two decades have shown us that unexpected events can turn the world on its head – from 9/11 to housing market crashes, financial crises, and pandemics.

Instead of depending on specific outcomes, give your plan the breathing room it needs to succeed.

3. Balancing Optimism and Caution:

Imagine having a barbelled personality – one that's optimistic about the future while also being vigilant about potential obstacles.

True optimism isn't just believing everything will turn out great; it's knowing that the odds favor you, and despite challenges, the overall outcome will be positive.

This mindset embraces the idea that there will be moments of difficulty and uncertainty along the way.

Balancing these seemingly opposing forces isn't contradictory; it's actually a powerful way to navigate life's twists and turns.

By embracing these insights, you can create a path that's not only financially sound but also emotionally fulfilling.

What happened this week?

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