On the Value of Train Wrecks

I don't talk about it much anymore but if you really looked, you will find evidence of some major train wrecks on my record.

That's to be expected.

I was lucky in a way -- I got started in business a long, long time ago when the economy was just as bad and not nearly so forgiving as it is today. That early part of my education was filled with mistakes (financial and otherwise).

One of the most important things I came to realize is that everyone makes mistakes. After all, that's how we learn. And as your deals grow in size and sophistication, so does the level of risk (generally speaking).

But once you come to terms with the fact that there will be some really bad financial days in your future, you may begin to see a way to truly understand (and compensate for) the risks you take.

Here's the deal -- learn to minimize your losses and maximize your gains. Sounds simple, doesn't it? And while it may sound simple, many people struggle with it for their entire careers.

For business people, it means that you should:

1. Learn to recognize mistakes quickly -- if it ain't going your way, or you suddenly realize just where you went wrong -- don't fret about it, correct it. Now. Any banker will tell you that your first loss is your cheapest loss. Move on.

and

2. Remember that's its not necessarily the number of successful (or unsuccessful) deals you can point to, it's more important to check the bank balance every now and again. Do you make more money when you win (your successes) than it costs you when you lose (unsuccessful, mistakes, etc.)?

This is not a small point. If you don't understand this, read it again until you do.

It's All About the Math

People talk about "batting averages" (success rates) all the time, but few actually discuss the math. And while I'm all for improving your performance ratio, don't forget to take a close look at what those numbers really mean.

In baseball, 2 hits out of ten at-bats will normally keep you in the minors (unless, of course you have other talents – say, a strong pitching arm), 3 out of ten will ensure you are you well paid (and at least semi-famous), and 4 out of ten will guarantee you a place in the hall of fame.

How do you feel about that? Can you live with a batting average of .400 (win/loss ratio)?

Or let's put it another way -- can you still become successful, rich and famous while still screwing up 6 out of ten times?

In baseball you can. I can't speak about your business model.

There's another point about those losses, they can be damaging to the soul. They can make us question our strategy, our talents, and even ourselves.

We laugh at the foolishness of baseball players who insist on wearing the same clothes on game day, or chewing the same gum, eating the same meal, or following the same routines.

Is it really superstition? Or is it their chosen way to deal with the self-doubt that comes with losing? Following a familiar routine is comforting and allows them to suit up and play another day.

Maybe you should give some thought to that. The practice isn't limited to ball players you know; most of the most successful financial traders also use routine (methodology) as a means of staying on course.

And staying on course is what it's all about.

You made mistakes in the past and you will make more in the future. That's a given, but how you deal with that fact is entirely up to you.

Learn from your failures and become stronger because of them. Try to learn from the mistakes of others -- it is, after all, much less costly and certainly less painful.

Be a bit easier on yourself. Take some time to learn about how you process both success and failure.

You might want to do a little more "networking". Working for yourself can be a lonely business, for the most part. Find people who already know something about business and who don't mind sharing now and again.

Read some success stories. Might cheer you up; it can't hurt.

But remember, while success stories are useful for getting yourself fired up, most of us learn through failure -- our own as well as those of others. We just aren't "wired" as human beings to do it any other way.

*First appeared on Capital Thinking OCTOBER 22, 2011