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https://lotsofvalue.substack.com/p/what-i-learned-losing-a-million-dollars-c4e
It’s funny. I had read about the Green Lumber Fallacy in Nassim Taleb’s book Antifragile, and heard him talk about the concept, but didn’t realize the story had come from this book until I re-read it recently.
The story is originally told as follows:
“I told him prices for two by fours of white fir, western SPF, and green Douglas fir, and continued reading the news wire. The “green” in green Douglas fir refers to the fact that it’s been newly cut (it hasn’t been dried) just like someone who is new at something is referred to as green.
Siegel looked over at me and said “I’ve never understood why they get such a premium for lumber they paint green.”
I couldn’t believe it. Here was Joe Siegel, easily trading more lumber futures than anyone else on the floor, and he didn’t even know the difference between green and kiln-dried lumber in the cash market. I wasn’t sure if he was kidding or not. But looking back, I can only now see how it was possible for him to be a successful trader without knowing green lumber isn’t actually painted green. He was a trader, and he relied on short term information like order flow and price action to make his decision because his time frame was short term. He didn’t let long term information more suited for investor types interfere with his trading. He knew the difference between traders and investors.”
(Source: What I learned Losing A Million Dollars, by Jim Paul and Brendan Moynihan, Columbia Business School Publishing, 2013, p.99)
Taleb retells the story with his take in Antifragile:
“In one of the rare non-charlatanic books in finance, descriptively called What I Learned Losing a Million Dollars, the protagonist makes a big discovery. He remarks that a fellow named Joe Siegel, one of the most successful traders in a commodity called “green lumber”, actually thought that it was lumber painted green (rather than freshly cut lumber, called green because it had not been dried). And he made it his profession to trade the stuff! Meanwhile the narrator went into grand intellectual theories of what caused the price of commodities to move, and went bust.
It’s not just that the successful expert on lumber was ignorant of central matters like the designation “green.” He also knew things about lumber nonexperts think are unimportant. People we call ignorant might not be ignorant.
The fact that predicting the order flow in lumber and the usual narrative had little to do with the details one would assume from the outside are important. People who do things in the field are not subjected to a set exam; they are selected in the most non-narrative manner – nice arguments don’t make much difference…
So let us call the green lumber fallacy the situation in which one mistakes the source of necessary knowledge – the greenness of lumber – for another, less visible from the outside, less tractable, less narratable.”
(Source: Antifragile, by Nassim Taleb, Random House Publishing, 2012, p.207)
For value investors it’s important to invert\[1\] what Jim Paul is saying about Joe Siegel and why he succeeded. Know the difference between trading and investing. Don’t allow things like order flow and price action to influence your decisions. Don’t let short term information suited for trader types interfere with your long-term investing process.
To apply what Taleb is saying to value investing, one must heed the warning against the over intellectualization of one’s investment process. Get inside and learn what really matters. Strip away the superfluous data that obscures the truth. Master the essential mechanics of an industry, and the few vital key performance indicators that drive a company. Superior results are not necessarily the reward of the most esoteric equations, but of the most disciplined and refined heuristics, applied with consistent precision.
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What I Learned Losing A Million Dollars is the memoir of Jim Paul, a man from a modest background who rose to become a prominent figure and trader on the Chicago Mercantile Exchange. He had a meteoric rise trading soybean futures. A string of early successes, lead him to believe he possessed a unique ability to read and time the soybean markets.
His fall occurred in 1983 after he ignored warning signs and held a massive, leveraged position in soybean futures. Despite consistent daily losses for months, his ego prevented him from exiting the trade. Ultimately, he was margin called and forced to liquidate his position, losing $1.6 million, his job, and his reputation.
The book is a memoir of Paul’s rise and fall, his postmortem exploration to understand why he failed, and then construct a system to prevent future failures. I would encourage you to read the book for the full details of his story and analysis. I will be sharing only the key ideas from his lessons learned.