“Heads I Win; Tails I Lose A Little” | Part 1
Larry Connors' Trading Lesson of The Day | September 17, 2024
In our previous Lesson of the Day, we saw the words of 20 of the more successful traders and fund managers in history all share the same sentiment: asymmetrical returns are the key to success and wealth creation in the markets.
Today, let’s begin with an important framework for you to apply for the rest of your life.
1. The Intellectual Base - Read The Dhandho Investor by Mohnish Pabrai as soon as possible.
As far as I’m aware, there has been only one book written devoted to asymmetric returns and because my policy is not to speak poorly about other professionals’ work, I won’t mention its title.
Therefore, in my mind, Mohnish Pabrai’s book is the only well-written, comprehensive book on the subject out there.
Pabrai is a self-made billionaire money manager who has taken the best concepts from Warren Buffett and Charlie Munger and has successfully applied it to investing.
The book is not a strategy book! It’s a real world book on asymmetrical investments written in simple to understand terms.
As I mentioned in our previous lesson, I’ve read many hundreds of trading and investing books over the past 40+ years. Many are great. Yet, none changed the way I view markets, trading, how to structure trades, and risk management as much as this one did and still does.
I’ve reread this book a number of times – it’s filled with an abundance of my notes. The majority of my trading strategies now revolve around the principles gleaned from the concepts and insights he provides.
In fact, I’ve been developing and publishing trading strategies, most which have been quantified, for decades. Many of my best trading strategies as a whole were developed after reading this book.
In many cases, I took already existing strategies and made them better through higher-level risk/reward trade construction. In other cases, I’ve developed new trading strategies because of the way Pabrai has shaped my thinking.
When new traders come to me and ask me what books they should read, this is where I start them. It teaches you how to “think correctly” about structuring positions as Pabrai repeatedly states “Heads I Win, Tails I Lose A Little”.
When you risk one unit (a fixed dollar amount) in the trade, with the objective of making many units (many times what you risked), it very much is “Heads I Win (many units), Tails I Lose A Little (one unit)”.
Buy this book, read it, reread it and most importantly apply it. As we read in the previous lesson, the philosophy of trading seeking asymmetric returns is a proven one. You saw that from the many legends of trading and investing confirming this.
Today is Stage One of building our framework. It’s our base. Tomorrow, in the Trading Lesson of the Day, we’ll move to the next stage of learning asymmetric trading.
I’ll see you then!
Larry
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