A Blog Mini Series

Part Two

Always Play For Stakes That Are Meaningful

You have probably heard the popular phrase, “Only bet what you can afford to lose.” You see it in investment type books, money management, in casinos, etc. Let’s take a deeper look into it.

Surely this approach is adopted by the majority. I don’t blame them, because it assures safety and prevents worry, a common need for human’s emotional well being. But what is an amount that you can “afford to lose?” For most it would be interpreted as “an amount in which if I lose it, it won’t hurt,” or “if I lose, it won’t make a significant difference in my general financial well-being.” A safe mentality, which leads to poor results.

So, what is that amount? A few dollars? A few hundreds or so? Common replies from the majority of speculators, if they happen to speculate at all. But think about this, say you risk $500 and you double your money, you’re still poor. Or, start a pooper scooper service business. You’ll make some money, but you have to work hard for it.

The best bet to beat the system is to always play for meaningful stakes. Now, this doesn’t mean you cash in the whole house or risk amounts that should you end up losing it would bankrupt you. But to bet amounts that inputs some worry and allows you to get over the fear of being hurt.

If the amount is so small that a loss won’t make any significant difference, then it is likely that it won’t make any significant gains either. The best bet is to go for the long shots. We’re not talking about a big bet on the roulette table. The payout if you win is big, but the odds are against you by a bunch. Remember: think in terms of being the house, and find the edges to the game (Part One).

Everyone’s risk tolerance is different. You may want to work your way up to build up your risk tolerance and rid of the fear of being hurt a little. You are going to eventually lose at times, it’s just a part of this game. The key is to limit those loses, and maximize the gains (we’ll go more into detail about this later).

Let’s say you lose. It’s not the end of the world. You may be a little poorer and it may hurt, but you can scrabble together more money and try again. The gain of knowledge from the experience is a meaningful gain in itself. Let’s say you win, all the wonderful! So, always play for stakes that are meaningful.

Do Not Diversify

It is called diversification. The diversification investment methodology is widely used and regarded by the investment community. It means to spread your money around or putting it into a lot of little speculations rather than a few big ones.

The idea of this is safety (again there’s that word) and a way to reduce one’s risk. If one investment speculation loses, then maybe the other ten will win and in theory will make up for the one loss and ultimately profit.

Again, this is one method that is used and taught to the majority of people who speculate and/or invest. But lets take a look at the major flaws and why the Rules of Risk and Reward goes against the majority and says not to diversify.

Diversification goes against the rule of playing for stakes that are meaningful. The more you diversify the smaller your stakes get. With smaller, less meaningful stakes, the less likely you are going to be wealthy.

By diversifying, you up the probability that the gains you make will be cancelled out by the losses leaving you at the same point you were at in the beginning. So what’s the point in that?

By diversifying, you place yourself in a situation where you will be “juggling” your speculations. The more speculations you have the more work, research, and studying you will have to do for each of them creating a hectic situation resulting in the likeliness of getting confused and overwhelmed. When this happens, irrational decisions are made and your money will likely dwindle away.

When you look at these flaws of diversification and weigh them against trying to create the feeling of safety, realistically it doesn’t make financial sense, at least towards the main goal we are trying to achieve.

Some diversity is okay. Maybe three or four won’t do any harm. Remember: it is much easier to watch one basket of eggs than a dozen of baskets.

Greed

“If they wanted less, they’d go home with more.” – Sherlock Feldman

Greed is one of those things that is “programmed” in the human psyche. Humans naturally think about themselves first before anything else or anyone. This trait of greed is possessed in people in varying amounts. For the context of the rules, we define greed as excessive acquisitiveness or wanting more, more, and then some more.

So what happens when greed takes over? You see the results from amateur gamblers, amateur stock traders, amateurs everywhere. They stay in for too long and end up losing. They stay in the “game” wanting to acquire more than what they came in for or the realistic expectation from the venture. They lose control of their desire.

Greed creates a destructive paradox. In trying to acquire wealth, the excessive want to acquire more and more will likely leave you having less. It defeats the purpose of trying to acquire in general.

We know the destructiveness of greed. If you can conquer greed, just that act of self-control itself will make you a better speculator than the majority of the population who is trying to acquire wealth. But, it is easier said than done.

“Do not stretch your luck.” 

A common line that is said by many but only a few understand the meaning to it. So let’s take a closer look into it.

In speculation or in gambling, you may from time to time have a streak of wins or an on going increase of value in a speculation. You will enjoy it so much that you will want to ride it forever. When this happens, you will most likely not have the realistic sense that this cannot last forever. Greed will likely keep you hoping and believing the streak will at least last a long time. You hold on or keep playing. In the end, you find yourself giving back your profits or watch the value come down to even and then ultimately to a loss.

So, what should you do then? Always assume that a streak of wins or a gain of profits will only last a little while. Also, always assume that your gains won’t be extravagantly big.

“Always take your profit too soon.” Or as it is said, “Do not swing for home runs, look for base hits.” When you have a good profit, cash out and walk away. Do not let greed get to you. Remember: no one ever went broke taking profits.

End of Part Two

Michael