Self-help books, master investors' paths to success, successful stock selection methods... Bestsellers generally use similar titles, because in the stock market, the cases of investors who have made big profits often attract almost everyone's attention, while the cases of failures are often more important but often overlooked.

After all, as Munger often says: If I know where I will die, I will never go to that place.

Coincidentally, the book "What I Learned Losing a Million Dollars", translated into Chinese as "止损" (Stop Loss), tells the story of a trader who lost all his wealth and underwent profound reflection.

The author Jim Paul, in less than 1 year, went from being a star at the Chicago Exchange to having nothing, even losing his parents.

Paul believed that his early success in the market was because he was smart, or because he was willing to break the rules. Until he had lost all his belongings and ended up in debt before he realized that his previous success was all due to good luck.

Only after losing all his money and going into debt did Paul realize that successful trading does not come from money-making secrets, but from understanding what leads to losing money. Because he found out that successful traders each have their own methods, but the ways to lose money are just a few.

For example, he believes that most investors tend to overly identify themselves with the market, subjectivizing the market position. Market losses should be external and objective losses. Once personal emotions are brought in, it becomes subjective losses.

This book is also considered a classic in trading psychology. Taleb recommended this book straightforwardly: "Just give the substance, no pretense, a rare gem in investment and financial books."

Excerpt from Chapter Six 'The Evolution of the Psychological Dynamics of Loss', sharing with everyone, wishing you a fruitful read!

"I can't abandon my position now because I've already lost too much." - The most common words spoken by losing traders

In mid-October 1983, when my soybean oil position was giving me a headache, I received a call from my mom: "Your dad is in the hospital preparing for cancer surgery. They say it's nothing serious, nothing major, but they still need to check."

The next day after the surgery, she called again to say that the cancer cells had spread throughout my father's body, leaving only 6 months. The doctors performed a colostomy for him and required immediate radiation therapy.

Two months later, I received a call from my dad: "Your mom is missing. Don't know where she went. She went out last night and still hasn't returned home." Later, I found out that my mom had committed suicide. She jumped into the Ohio River and drowned.

The only good news is, she had no idea I had gone bankrupt, so the reason wasn't me.

She took her own life because my father's condition was severe, close to death, and she couldn't bear it. If she had done it because of me, I don't think I could have carried on, but they didn't know about my dire situation either. We still lived in the same house, just didn't do the same job. They knew I had changed jobs, but not the reason.

At that time, my father was in a nursing home, with a full-time nurse caring for him. Every weekend, my younger brother and I took turns to visit him, I was busy taking care of him, accompanying him, seeing him gradually approaching death. In the end, he passed away in August 1984.

From August 1983 to August 1984, I lost all my money and accumulated a debt of 0.4 million US dollars, lost my exchange membership, job, director position, and executive committee membership, and eventually lost my parents as well. I lost everything that was important to me, except my wife and children. It was a very difficult 12 months.

Talking about these things is not to seek sympathy, but to express my important observation on the nature of losses.

The losses in the market are different from the losses in my personal life; losing money in Las Vegas is different from market losses, and these losses are different from losing my parents, as well as losing my exchange director position.

Everyone probably knows that no matter what business you do, there will always be losses. Light bulb manufacturers know that out of every 300 light bulbs, 2 will be defective. Fruit dealers know that out of every 100 apples, 2 will rot. These kinds of losses are not a problem, but unexpected losses or losing balance is serious.

Knowing that there will be losses in business is completely different from admitting and accepting losses in the market.

People in the market often find it difficult to voluntarily (compared to fruit vendors, light bulb merchants who passively accept) admit their losses (that is, accept and control losses to avoid affecting the overall trading activities).

This is because losses are always seen as 'failures', just like in any other area of life, the word 'loss' carries a negative connotation. We often equate losses with mistakes, bad things, and failures, while victory is seen as correct, good, and successful.

For example, making a mistake on a school test leads to losing points. Similarly, when we lose money in the market, we think we must have made a mistake to lose money.

In the "American Traditional English Dictionary", the meaning of "lose" is: (1) to be deprived due to death; (2) to fail to win (i.e. to lose a game, or be defeated). When we say "lost", it mostly refers to losing a game, but somehow, losing/winning, right/wrong, and even mixing up with making money/losing money in the end.

However, losing in a competition does not necessarily mean that you have done something wrong, perhaps you were just defeated. If you did not participate in the competition, but still lost, then you must have placed a bet on the outcome of the competition (or expressed your prediction of the result), so in this case, you may have lost money (or predicted incorrectly), but you were not defeated.

01 External Losses and Internal Losses

There are many different types of "losses". Broadly speaking, losing keys is a loss, losing a game or match is also a loss, including money, reason, self-esteem, self-control, parents, bets, and jobs, etc., all could be lost or lost.

But to sum up, "losses" can be divided into two categories: one is internal losses, such as self-control, dignity, love, reason; the other is external losses, such as bets, games or matches, money.

External losses are objective, internal losses are subjective. In other words, external losses are not subjective recognition or personal interpretation, they are objective facts. Internal losses are defined based on personal (i.e. subjective) experiences.

In other words, if a loss is the same for you, me, or anyone, it is an objective loss. If this loss makes everyone feel different, purely defined by personal experience, then it is a subjective loss.

For example, tens of thousands of people pass away every day, but not everyone feels like they have "lost" anything, except for a few close friends and individuals involved. This kind of loss is an internal loss, originating from personal experiences, feelings, and reactions. It is subjective and can only be experienced through individuals.

As for Kentucky losing a basketball game, it is an external objective fact for both team members and spectators.

This objective loss will not change due to your feelings or reactions, it can only be accepted. However, for players or spectators, if they connect the success or failure of the team to their own dignity, then this external loss will be replaced by personal feelings, thus internalized.

We often consider loss, mistakes, negativity, and failure as the same thing, so 'loss' is seen as having a negative connotation in daily language, which is not surprising. However, in the trading market, losses should be seen as just like a bad light bulb or a rotten apple mentioned earlier, just a part of business that must be handled calmly.

Loss does not necessarily mean a mistake, and losses are not necessarily a bad thing. Even a very good decision may result in a loss.

Similarly, making money based solely on hearsay in trading is actually a bad thing because you may become more dependent on those unreliable information.

Market losses should be external and objective losses, only when you bring personal emotions into it, it becomes subjective loss. Over-involvement of the self leads you to view this loss in a negative way, turning the loss into a failure, something bad, and a mistake.

Our psychological factors are related to the self, if you can eliminate self-consciousness in the decision-making process, then you can start controlling the losses caused by psychological factors. To prevent market losses from turning into internal losses, you need to first understand how this situation occurs, and then avoid it.

02 Market Losses Transform into Internal Losses

Understanding the key to converting external losses into internal losses involves first distinguishing the subtle difference between "facts" and "opinions".

According to the definition in the "American Traditional English Dictionary," "fact" refers to things that have been objectively confirmed. Whereas "opinion" is a personal evaluation and calculation, and the correctness of opinions depends on whether they align with the facts. Therefore, opinions can be right or wrong, while facts cannot.

For business operations and market transactions, using "right" or "wrong" to describe them is inappropriate, as is saying "win" or "lose." When entering the market to trade, it's not about right or wrong, win or lose, but about how you make decisions.

Decision-making is a process of careful consideration and seeking conclusions. It involves making judgments and choices among different options because at the moment of decision-making, the facts have not yet occurred and are unlikely to happen. Success depends on the revelation of many future events to gradually take shape.

Therefore, decision-making is not about choosing between right and wrong. Looking back after everything settles, decisions can be assessed for their merits and demerits, but there is no concept of right or wrong.

In the trading market, only expressed opinions are subject to being right or wrong, and market positions are simply about being profitable or not. However, due to the semantic confusion mentioned earlier, it is easy to mistake losing money in the market as an error.

In this way, you perceive a decision related to money (external) as your own reputation and dignity (internal).

This is when self-awareness interferes with trading positions, starting to view the market from a personal emotional standpoint. Consequently, losses transform from an objective existence into subjective affirmations. It ceases to be just a financial loss but becomes a form of personal internal loss.

An example of market position emotionalization is that many people often liquidate profitable positions, while holding onto losing positions. This is because they see making money and losing money as a reflection of their intelligence or self-worth, feeling foolish or wrong if they cut their losses. This confuses monetary value and self-worth.

Describing market positions or trades as 'right' or 'wrong' can be categorized into three situations:

(1) This is a form of expression of opinion, something we can all do;

(2) Represents that market positions and trading activities have been personalized by individual emotions;

(3) Any losses (or victories) are internalized.

Do you still remember the day when I boasted about earning 0.248 million US dollars? 'I' made so much money for myself and others, 'I' am so smart.

At that time, I did not realize that what 'I' was doing was internalizing market positions.

03 Five stages of internal loss

Although comparing market losses to loss of life may seem strange, we typically do not equate market losses with matters of life and death, but experiencing market losses surprisingly shows a psychological process similar to facing death.

When my father was critically ill, a friend gave me a book discussing terminally ill patients called 'On Death and Dying', written by Elisabeth Kübler-Ross. She interviewed 200 terminally ill patients and established five psychological stages that patients go through after learning about their condition.

In many people facing major personal tragedies, such as the death of a spouse or child, we also see the same five stages. I believe the process of internalizing losses is similar to this.

This book discusses market trading and refers to it as the 'Five Stages of Internal Loss'. The following briefly introduces each stage, referencing my own experience in soybean oil trading.

1. Denial

Upon being diagnosed with a terminal illness, the immediate reaction of patients is, 'No, I don't have it. It's impossible.' Some patients also seek more opinions from other doctors in denial, hoping to find different views to comfort themselves, consciously ignoring the same diagnosis and emphasizing more optimistic opinions.

During the gradual decline of soybean oil from September to October 1983, my reaction was the same. At that time, I was losing money but adamantly denying that the market had turned. Remember?

I just felt really frustrated, thinking it should be a deal that would make me millions in profit, remember? By October, my losses had reached the point of losing all the capital, but I didn't even know how much I had lost.

This is just an emotional denial. If you can calculate every penny when making money, but are unwilling or afraid to sit down and calculate how much money you have lost, then you are denying the loss.

I used to ask other traders for their opinions on the market situation, this is also like 'shopping around', seeking help in times of trouble. Of course, I only listened to bullish views and automatically ignored bearish ones.

2. Anger

When the situation can no longer be denied, anger, or anger, jealousy, resentment arise. The anger spreads in all directions (e.g. nurses, family, doctors, therapists) and is randomly projected onto any situation. The anger accumulated from setbacks is mainly vented on family members. For a while, Pat and the children saw me as if I were a plague.

3. Bargaining

In the first stage of being unable to face reality and the second stage of blaming others, patients try to delay the inevitable outcome through some compromise: 'If God decides to take me away from this earth, and is unwilling to respond to my anger, maybe he wants me to ask nicely.'

In September 1983, I made an agreement with myself that as long as the market rebounded to the level at the end of August, I would close my position. By November, I only hoped not to lose money, and wished I could go back to the time before trading soybean oil.

4. Depression

抑郁是一种复杂的心理失调，对之长篇大论恐怕会逾越本书范畴。一般来说，挥之不去的悲伤情绪、疏离自我和亲人、饮食和睡眠习惯的改变、欠缺活力、注意力不集中、优柔寡断和拒绝听从建议等等，都是抑郁的症状。

我当时没去看医生，所以不知道自己是否真的罹患抑郁症，但1983年那个秋季我的确有许多类似症状。黄豆油仓位让我精疲力竭，睡不着、吃不下，四个星期就瘦了15磅，对过去喜欢的事情全都兴趣缺乏，时时刻刻都觉得非常疲倦，无法专注于工作，更不愿听从那些叫我赶快认赔出场的意见。

5.接受

最后，病人会屈服于必然的结果。在这个阶段中，沟通比较不依赖语言。库布勒·罗斯指出，“接受”几乎是不带任何感情，只看到屈服和放弃。有些病人会战斗到最后一刻，始终抱持希望，几乎不可能到达接受的阶段。

越是努力躲避必然的死亡，越想去否定它，就越难抵达最后这个阶段，可是谁也躲不掉啊，最后终究还是会到来。

同样地，交易员最后也要面对无法逃避的现实，“接受”亏损，可能是自己“觉醒”了才认赔出场，或者是旁人迫使他不得不出清仓位。

以我的状况来说是后者。如果不是旁人的逼迫，我绝对不会接受，认赔出场。

绝症病人在历经各个阶段时，往往还是会抱着希望。即使是最认命的病人都会盼望着一丝希望，也许是发现新药物或新疗法，或者期待着什么新研究在最后一刻成功。

They have unlimited confidence in doctors who bring hope, even when hearing bad news, they will still find hope in it. When exchanging opinions with other traders, I often only pay attention to those related to my position, especially favorable news.

Stage 4: Inner Loss and Market Participants

When market positions internalize losses and traders don't know what to do (like terminally ill patients at a loss), they will enter the five stages of internal loss.

He will deny that it is a loss, believing that the trade is still profitable, just not on the right track yet. He will be angry with the broker, snap at his wife, blame the market, then start bargaining with the heavens or the market, as long as the market does not let him lose money, he will immediately close the position and leave.

Then, feeling frustrated and depressed about losing money. Finally, he will come to terms with it, maybe he wakes up, perhaps he finally listens to the analyst's advice to sell, or the margin collector helps him close the position forcibly.

Market participants may not necessarily go through the stages in order, some people may find relief when the market briefly rebounds, repeatedly reverting back to the denial stage.

At the sight of a slight market rebound, he believes the market has finally turned around. When the market falls again, he falls back into denial, then feels angry, and the cycle continues. Each brief rebound makes him repeat these stages, while losses grow bigger and bigger in the process.

Even when positions are still profitable, traders or investors may go through these five stages.

For example, although the market position is still profitable, it is not as profitable as before. When this situation arises, investors may still remember the high stock price from before when this position made the most profit. They will deny that the market has ended, and when there is repeated selling pressure in the market, their reaction is anger and frustration.

Then, unsure of who to negotiate with, they swear that as long as the market returns to its peak, they will immediately take profits. Subsequently, feeling frustrated and hesitant for not exiting in time, they may even delay until the profitable position turns into a loss.

Thus, they fall back into the denial phase, blame everyone, and get trapped in a vicious cycle, leading to repeated losses.

My soybean oil trade is like this. Every time the market rebounds, I breathe a sigh of relief, thinking the downward trend has stopped. After enduring each decline, it feels like I am just entering the market, establishing positions anew, and thinking I will evaluate and determine the market situation from a new perspective and standard.

05 Individual Events and Continuous Processes

As mentioned earlier in this chapter, some people truly internalize external losses, where players and spectators alike may see the outcome of a ball game as a reflection of personal dignity or success.

Therefore, internalizing external losses as psychological emotions is easier for activities without a clear endpoint. This is because losses generated in continuous processes, just like any internal loss, lack a predetermined endpoint, making internalization easier.

As for losses caused by activities without a clear endpoint, internalizing them into psychological emotions is much easier. This is because losses occurring in continuous processes, with no defined endpoint, are easily internalized.

In this continuous process, participants must make constant decisions, and these decisions will affect their profits and losses. Conversely, individual events (such as a football match, gambling on a roulette wheel, blackjack, or other casino games) have clear outcomes, which is the characteristic of external losses.

Losses caused by individual events are very clear and cannot be subject to interpretation. If I bet on the Kentucky basketball team to win, but they lose the game, then I have lost the bet, which is an external loss caused by individual events, and there is nothing to argue about. Or, if I bet on black 21 in roulette and the ball lands on red 17, then I have lost, and there is nothing more to be said.

The trading market belongs to the category of continuous processes because market positions do not have a predetermined endpoint.

Of course, the market has definite opening and closing times every day, but market positions do not disappear as a result, in fact, they can continue indefinitely.

Although market losses should be external losses, because they are a result of a continuous process, they are also easily internalized due to emotions.

In a continuous process, market positions do not have a clear endpoint, neither knowing when nor under what circumstances they will end. This uncertainty about the future easily triggers the five stages of internal loss, meaning that the loss will gradually be internalized and subjectively perceived by individuals, because losing money in the market is a continuous process, and no one forces you to admit it as a loss.

Here, it's just you and your money, and the market becomes a silent thief. As long as you don’t cut your losses and exit, you can deceive yourself into thinking that the position will be profitable, just not on the right track yet.

That position may be losing money, but you will tell yourself that you are not losing unless you sell, especially for stock investors, because you actually own those stocks, and you don't have to worry about margin calls, so there's no one forcing you to admit it as a loss.

Considering problems from a historical perspective enables investors to surpass their emotions and remain rational. This is also the only way to succeed in investments.

Editor/ping