How you define an outcome (losing capital), effects future outcomes.

This originally appeared in March 2010.

Redefining or changing a word in a sentence can provide the necessary psychological shift to see things in a different way. This different perspective can lead to different results (hopefully positive). Probably the most common redefined word in finance is “Loss” which is turned into “Investment in Education” or “Tuition”. I am making the assumption that a “Loss” means, the losing of capital. The reason I hate this redefine is because it is a passive, indiscriminate shift. Not all losses are educational and not all losses have equal consequences. If I put my hand on a hot stove and get burnt, that was not a learning experience because I already knew the outcome. Putting my hand on a stove does not have the same consequences as throwing myself in a fire.

How do I define “Loss” or having less capital? It depends on how I came about having less capital.

Having less capital because of something I know is a loss.
Having less capital because of something I should know is an investment that may turn to a loss.
Have less capital because of something I do not know is an investment.

A side note: If I put my hand on a hot stove and it does not burn (by miracle), the next time it will hurt twice as much because of expectation (how gross is water if you think it is milk) and having to make a decision if it is a rule or outlier. You basically have to start over on learning something about yourself, the market, and how they interact in those instances. Trading works the same way, you can make money by making a mistake (breaking rules) or being lucky but I promise you it will be some of the most expensive money you have ever made.

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