Minor Axiom I – The Indissoluble

Always play for meaningful stakes

“Only bet what you can afford to lose”, says the old bromide. You hear it in Las Vega, on Wall Street, and wherever people risk money to get more money. You read it in books of investment and money-management advice by conventional counselors like Sylvia Porter. It is repeated so often and in so many places that it has taken an aura of truth through assertion – just like the shrinks’ bromide about getting calm.

But you should study it with the greatest care before making it a part of your speculative toolkit. As most people interpret it, it is a formula that almost assures poor results.

What is an amount that you can “afford to lose”? Most would define it as “an amount which, if I lose it, won’t hurt”, or, “an amount which, if I lose it, won’t make any significant difference in my general financial well-being.”

A buck or two, in other words. Twenty bucks. A few hundred. These are the kinds of amounts most middle-class people would consider loss-affordable. And as a result, these are the kinds of amounts most middle-class people speculate with, if they speculate at all.

But consider this. If you bet $100 and double your money, you’re still poor.

The only way to beat the system is to play for meaningful stakes. This doesn’t mean you should bet amounts whose loss would bankrupt you. You’ve got to pay the rent and feed the kids, after all. But it does mean you must get over the fear of being hurt.

If an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring you any significant gains either. The only way to win a big payoff from a small wager is to go for a long, long shot. You might but a $1 lottery ticket and win a million, for instance. That is nice to dream about, but the odds against you, of course, are depressingly high.

In the normal course of speculative play, you must start out with a willingness to be hurt, if only slightly. Bet amounts that worry you, if only a little.

Perhaps you will want to start out modestly and then increase the dosage of worry as you gain experience and confidence in your own tough psyche. Every speculator finds his or her own level of tolerable risk. Some, like Jesse Livermore, bet so boldly that they can go broke with spectacular speed – and as we’ve noted, Livermore did, four times. His risk level was so high that it scared other speculators, even veteran ones.

Frank Henry used to study Livermore’s gambles and come home shaking his head in stunned amazement. “The man is mad!”, Frank Henry would say. His own risk level was lower. He estimated once that if all his speculations blew up in his face in a single great cataclysm, when the smoke cleared he would be worth roughly half of what he had been before.

He would lose 50%. On the other hand, he would keep 50 percent. That was his chosen degree of worry.

Another man who believed in playing for meaningful stakes was J. Paul Getty, the oil tycoon. His story is instructive. Most people seem to think he inherited his huge wealth from his father, or at least inherited the seeds of it. The facts are quite otherwise. J. Paul Getty made that monumental pile on his own, beginning as an ordinary middle-class speculator like you and me.

It irritated him beyond endurance that people thought he had had life handed to him on a silver platter “Where does this notion come from?”, he shouted at me once, exasperated. (I met him at Playboy. He was a stockholder in the magazine’s parent company, served for some years as its business and finance editor and wrote thirty-four articles for it. This was his way of relaxing when he wasn’t tycooning.)

He finally concluded that the enormous size of his fortune was what made nearly everybody leap to a wrong assumption. People evidently found it too hard to believe that a man could start with a modest, middle-class kind of stake and make a billion on his own.

But that is exactly what Getty did. The only advantage he had over you and me was that he started early in this century, when everything cost less and there was no income tax. He got no money from his somewhat frosty and forbidding father beyond a couple of modest loans, which he was required to pay back on a no-excuses schedule. The most valuable thing he received from his father was not money but instruction.

The senior Getty, George F., was a Minneapolis lawyer and self-taught speculator who stuck it rich in the Oklahoma oil boom at the start of the century, developing rules of play that sound a little like some of the Zurich Axioms.

He was a man with stern, unbending beliefs rooted in the Work Ethic. As J. Paul wrote in Playboy, “George F. rejected any ideas that a successful man’s son should be pampered or spoiled or given money as a gift after he was old enough to earn his own living.” And so young J. Paul struck out to seek his fortune on his own.

He had originally thought he wanted to join the diplomatic corps or become a writer, but his father’s love of speculation was in his blood. He was drawn to Oklahoma and oil. Working as a roustabout and tooldresser, he accumulated a few hundred dollars. As his little pile grew, so did the urge to put it at risk.

It was now that he displayed his understanding of the principle underlying Minor Axiom I. He had learned this principle from his father. Always play from meaningful stakes.

He could have bought a piece of the action for $50 or even less. There was no shortage of opportunities to do this. The oilfields swarmed with wildcatters and speculative syndicates that needed money to continue drilling. They would sell tiny shares to anybody with a few bucks. But Getty knew he would never get rich on tiny shares. Instead he went after something bigger. Near the little hamlet of Stone Bluff, another speculator was offering a half share in an oil lease that looked promising to Getty. He decided to bet on it. He bid $500, nearly his entire wad. Nobody topped his bid, and J. Paul Getty was officially in the oil business.

In January 1916, the first test well on the lease hit pay dirt, more than 700 barrels of crude oil a day. Not much later, Getty sold his interest for $12,000, and that was how his fabled fortune was founded.

“Of course, I was lucky”, he said many years later, looking back on that seminal adventure of long ago. “I could have lost. But even if I had, that wouldn’t have changed my conviction that I was right to take the chance. By taking a chance – a pretty big chance, I’ll admit – I gave myself the possibility of getting somewhere interesting. The possibility, the hope, you see. If I’d refused to take the chance, I would not have had the hope.”

He added that even if he had lost, it would not have been the end of this world. He would simply have scrabbled some more money together and tried again. “So it seemed to me I had a lot more to win than lose”, he reminisced. “If I won, it would be various kinds of wonderful. If I lost, it would hurt, but not all that much. The right course of action seemed clear. What would you have done?”

The Zurich Axioms By Max Gunther

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