By now you must have heard of James Cordier. If you haven’t then here’s a small background: James Cordier was a hedge fund manager in the USA. He managed a $150 Million Option selling fund. On a Friday, in November 2018 Mr Cordier released a video(Here’s the link) where he conveyed to his investors that he had wiped of all his clients capital by losing everything in a single trade. He managed money for 290 Clients. In a Single trade, the fund got wiped of all its capital and more. It’s been a devastating event for both, the clients and Mr Cordier himself. Here’s a link to the Video that James has posted: We aren’t here to judge what Mr Cordier did but rather take this opportunity to learn a few lessons from it.
It is important to learn not to lose because when we lose money, we seldom ask the question as to why we lost, rather we find new methods of making money. You can find 100’s of books on how to make money but I strongly believe they might all be ineffective if you haven’t learnt how not to lose. It is simple: “There are many methods to make money in the markets, but relatively fewer ways to lose”. If we can learn the latter then successful investing will follow.
Warren Buffett once said,” There are two rules to investing: Rule No.1: Never Lose Money & Rule No.2: Never Forget Rule No.1”. Until recently I never really understood what he meant. Because how can you invest without losing money? How could you have a 100% win rate? Buffett himself has seen his portfolio fall by 50% more than 6 times in his career. Here’s what he meant: When he says “Lose” he doesn’t mean there won’t be any losses. You don’t win every match in tennis. You win some, you lose some. There will be lots of losses, just like any other business. But the losses you are trying to avoid, are the ones that you haven’t made allowances for. The losses that might put you out of business completely. For example, Leverage has the potential to wipe you out and more. Unfortunately, that’s what happened with Mr Cordier.
Why do we lose?
Take Investor X. He buys a stock going at 180 with the thesis that he could make a good 50-60% in a matter of 8-9 months. In a couple of months, the stock gets beaten a little and is trading at 150. Investor X holds his stomach, shows some grit and says, “It’s an even better buy here”, and goes on to buy some more. It’s been 2 years, the stock has been hammered to 90. The time horizons and thesis of investment has changed. Investor X starts pulling out Warren Buffett Quotes and has now transformed into a long Term Investor (At least he thinks). So here he is, lost half his capital, no plan in hand but refusing to get out. The truth of the situation is: Investor X has a psychological problem, not a strategic one. He equates being profitable with being right and losing money with being wrong. A loss is a direct attack on the self-image, constructed by the ego. Since the ego wants to be right, and will always protect itself at any cost, we will sacrifice profits; endure excruciating pain for long stretches. The objective is no longer to be profitable, but to validate the ego.
The markets do not know who you are and what you do. Eliminate the ego in the decision-making process and you will see a change in the way you invest. You will be able to control your losses. Do not personalize your losses; they have nothing to do with your identity.
The greatest of investors do not personalize their losses. They accept it as it is and move on. They know where they stand and who they are. Learn to keep your ego and emotions away from the decision-making process and you will be a better investor.
Hence the famous line goes “If you do not know who you are, the markets are an expensive place to find out”. Focus more on the psychological aspects of investing not the strategic ones.