One summer, legendary trader Jim Paul entered a trade based on fundamentals, insight and intuition. As the trade entered its second month, Paul knew he had a winner. He was sitting on a substantial gain and was dreaming about even greater profits. That was the first sign of trouble. You see, Jim Paul didn’t just know he was right. He knew that he would continue to be right, that it was simply a matter of time before his profits doubled or, if played his cards right, even tripled. He after all was Jim Paul, a Governor of the Chicago Mercantile Exchange, arguably the most important futures exchange on the planet. Jim wasn’t born at the top. He had schooled himself to get that far. He was a winner and this would be another big win. Yep, he just knew it.
As summer fell into autumn, so did Jim’s trade. By October, his position had firmly reversed and he was facing big losses. As the days ticked by, Jim knew the market was wrong and that each day it would come to its senses. He sat, paralyzed between fear and greed. When he was finally stopped out of his trade by the exchange authorities, Jim had seen his sure thing turn into a $1.6 million loss. He sat in abject silence as people carried computers, furniture – anything and everything that could be sold – out of what was no longer his office, in the very important place where he no longer had a voice. Broke. Fired. Shamed.
A few years later, Brendan Moynihan, then a Wall Street Analyst, had Jim recount his story. The tales, including what happened to Jim in the aftermath of that fatal trade, are entertaining and thought provoking. From Jim’s story, Brandon abstracts general principles for the business of investing, trading and speculating in financial instruments. Together, these tales and principles form the excellent book, What I Learned Losing a Million Dollars.
What I Learned Losing a Million Dollars provides sound investment practices to minimize losses, providing more opportunities for capital gains. Successful traders have a plan. That plan includes an exit strategy. That exit strategy includes a stop-loss. And, most importantly, they have the discipline to exit as planned.
The book is valuable to entrepreneurs and business owners more generally because trading is a specialized type of business. Successful traders and successful business owners both know why they are doing what they are doing. They have a purpose. They find meaning in that purpose. They have a plan – a strategy – and they stick to it win or lose. Especially when they lose. They plan to win, knowing that they won’t win every time. They know that despite all, sometimes they will lose. And when they do, they cut their losses fast.
So how can you apply that to your own business?
First and foremost: have a plan. There are many ways to make money. Like successful investors, successful businesses have a plan. Your plan can be as simple as a one page model, complete with a cash conversion diagram showing how your business makes money; or, something more presentable to an investor or lender; or, something in between. If you don’t have a plan, start with a one pager or try this eight step process. Either way, get one fast.
Second, put a stop-loss on each offer, project, ad campaign, new-hire, or other cash flow impacting investment or expense. Again, on paper first, show how the investment or expense is supposed to make or save you money. And – this is the important part – if things don’t go as planned, define before the fact at what point you will abandon the offer, the project, the ad campaign, the bad-hire, etc. I can show you how to create one of these. You’ll need the discipline to execute and cut your losses.
Cut your losses fast and give yourself more opportunities to test and more time to succeed big. What not to do?
- What I Learned Losing a Million Dollars, Jim Paul and Brendan Moynihan.
- Nasim Talib, author of Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and The Black Swan: The Impact of the Highly Improbable, among others.
- Peter Thiel, author of Zero to One: Notes on Startups, or How to Build the Future, among others.
- Tim Ferriss podcast with with Brendan Moynihan.
What not to do
We believe that entrepreneurs working in independent businesses are the catalyst of human progress. Our purpose is to help like-minded businesses thrive. Sometimes the best place to start is determining what not to do:
- Do not debt. It ties your hands. If you’re already in debt, eliminate your debt as soon as possible.
- Don’t extend customer credit. If you already have – reduce 90 days to 60, 60 to 30, 30 to 15, 15 to 7 and 7 to 0. Exchange credit for 30 day guarantee (check the rules in your state, you’re probably already bound to a 30 day return policy; you may as well as advertise the obligation in the form of an explicit guarantee).
- Don’t continue to carry or service customers that are past due.
- Don’t treat all segments of your business equally. The 80/20 rule says that a critical few segments account for a super-majority of your profits (you can begin to get a glimmer of this by looking at top line sales but sales alone don’t tell the whole story).
This last point is simplest and and potentially the most important single thing you can do. You can follow-up this analysis by redeploying resources from unprofitable segments to segments of high profitability.
If you would like us to help you, we’ll set up a free, no obligation 45 minute Q&A. You can determine whether and how we can be of use to you.
We apply 80/20 and other Power Tools to quickly determine a business’s critical segment of high profitability – as well as determine energy draining, unprofitable segments. All services come with a 30 day money back guarantee (per above, we practice what we preach).
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