“Don’t push your luck,” says the ancient maxim. Only the lucky really understand what it means.
The unlucky are often taught its lesson by violent means, but the lesson seldom seems to stick. It is characteristic of the unlucky that they go on violating this adage again and again.
For instance, there was the unlucky couple who almost made a small fortune on Wall Street a few years ago. Their story was told to me a Merrill Lynch account executive. Like may or most stories about inept handling of this Fourth Technique, it is a story that can make you want to cry.
This couple, a man and woman in their forties, had been in the stock market a long time, with discouraging results. Years back, she had inherited about $100,000 from her father. She and her husband decided to put it into the market in hopes of making it grow. In observance of the Third Technique, they were ready to take a risk. Too bad they didn’t know about all the other techniques too. They ran their $100,000 to about $50,000.
Then in the late 1970s, the beginnings of a lucky break loomed up The couple lived and worked on the fringes of the television business, and one day, inadvertently eavesdropping, the woman overheard a hushed and tense conversation between two network executives. The conversation had to do with a man named Chuck Barris, producer of several well-known zany quiz and talent shows such as “The Dating Game” and “The Gong Show.” Barris’s small company, Chuck Barris Proroductions, had been publicly held since the early 1970s. Its common shares were traded over-the-counter, but not very enthusiastically. In the five years preceding 1978, they had never risen any higher than 87.5 cents a share, and most of the time you could pick them up for 25 cents or so – if you wanted them.
The gist of the overheard conversation, however was that exciting changes were afoot at Chuck Barris Productions. The changes were known so far only to a small, close-mouthed group of people. Soon the word was bound to spread to the showbiz community at large, and then, conceivably, the stock’s market price could soar.
The woman rushed home to tell her husband the news. For several days they checked it out discreetly. It seemed to be a true scoop. The gossip was that Barris’s little company was enjoying unusual prosperity and had some ambitious expansion plans.
The couple called their broker. He fed the stock’s trading symbol, BCHK, into his desktop computer terminal and was astonished to learn that the bid price had more than doubled in the past month. It was now quoted at two dollars. The couple grew wildly excited. Their broker gave them the usual warning against buying stock on a hot tip, but they felt they had exercised proper prudence by checking the story with care before calling the broker. They believed a genuine, once-in-a-lifetime lucky break had fallen into their hands from heaven.
Over a span of a few weeks, they put some $25,000 into BCHK. This was about half the total worth of their brokerage account. It seemed like a large amount to bet. Indeed, it came perilously close to a compulsive gambler’s style of overrisking. But they had been in the market so long without a payoff that they felt compelled to go after a big win.
As it turned out, BCHK was an even better buy than they had dared hope. By sheer good luck, they had stumbled into one of those rare situations in which for a brief shining hour, everything a company touches turns to gold. Chuck Borris Productions seemed unable to make a mistake. All its gambles worked. Even dumb projects paid off. Money poured in. And the stock price soared. After buying it at slightly more than two dollars a share, the happy couple watched popeyed as it jumped to nine dollars in less than a year. They had quadrupled their money in a space of a few months.
“Sell!” their broker urged.
He was right. They should have sold. They were enjoying a run of luck. As nearly all lucky people realize instinctively or learn through experience, runs of luck always end sooner than you wish. Sometimes they are long runs; much more often they are short. Since you can never tell in advance when a given run is going to end, the only sensible thing to do is preserve your gains by jumping off early in the game. Always assume the run is going to be short. Never try to ride a run to its very peak. Don’t push your luck.
The couple could not make themselves sell out, however. They were gripped by greed. “If this stock quadrupled once,” they said, “it could quadruple again, right?”
Right. It could. But the chances were against that. It is always a mistake to bet on a long run. As a matter of fact, most lucky people would have sold that stock long before it reached nine dollars a share. Having bought it at two dollars, many would have sold at four dollars. I would certainly have sold by the time it hit six dollars. To double or triple one’s money in a few months is enough to ask of one’s luck. Though it turned out later that the price would rise to nine dollars, it would have been irrational to expect that outcome or even to hope for it. The rational approach would have been to assume that you were in on a short run and that the ride was probably over at four dollars or six dollars.
The greed-gripped couple held on their stock. Within a year it plummeted back to four dollars. They kept hanging on, hoping the company’s fortunes would improve again. They didn’t. Eventually the couple sold at seventy-five cents. They were losers again.
Always assume a given run will be short. You will virtually always be right. The law of averages is heavily on your side.
The simplest way to illustrate this is to calculate the mathematics of probability in tossing a coin. If you can toss it 1,024 times, the odds are there will be one long run in which heads comes up nine times in a row. But there will be thirty-two short runs in which heads comes up four times in a row.
Which is the way to bet? On the short runs, of course.
Let’s say you have some money riding on this tossed coin. You are betting on heads. A run has started. Heads has come up four times in a row, and you have accumulated some winnings. What do you do?
Do you hope you are in on the beginning of a long run, maybe a run of nine heads in a row? And do you therefore let your money ride, praying for a big win? That would be the thinking process of the typical loser.
Or do you assume this run will be short, as most runs are? And do you therefore take your money out of the betting and put it in your pocket? That is the reaction of the lucky.
Always cut runs short. Sure, there will be times when you regret doing this. A run will continue without you, and you will be left enviously watching all the happy players who stayed aboard. But statistically, such gloomy outcomes are not likely to happen often.
Much more often, you will be thankful you left early. People will be puzzled when you quit, will call you foolish, and will try to urge you aboard again. “This run isn’t about to end yet!” they will say. “Look at all the fun you’re missing!” And then the boat will sink.
A peculiar characteristic of the genuinely luck – at least it seems peculiar until you analyze it – is that they so often appear pessimistic. But it isn’t pessimism; it is only run cutting. It is a rational approach to a world of unpredictable, uncontrollable events.
One problem is that long, high runs of luck make news and get talked about. If you go to a racetrack and have a so-so day, you will forget it quickly. But if you have one of those days when every horse runs for your benefit, you will undoubtedly bore your friends with the story for a long time. We hear more about big wins than about the vastly more common little wins. This can delude us into thinking the big wins are more attainable than they really are. We think: “Well, if all those stories are true, maybe there’s a big win waiting out there for me.” So, we push our luck, ride our runs too long – and sink.
Gambling casinos always publicize big wins and long runs of luck because they know these lovely stories will do two things: first, bring in new customers; and second, encourage them to ride their runs too long. In the romantic old game of roulette, for example, one of the popular even-money bets is rouge on noir, red or black. The mathematical probabilities dealing with runs are exactly the same as in the case of a tossed coin. Every night in any active casino, short runs of red – three in a row, four in a row – happen hundreds of times. No casino ever troubles to publicize those but on the rare occasions when a long run happens – ten or fifteen in a row – the casino’s publicity office is sure to spread the news around.
In Monte Carlo once, red is supposed to have come up twenty-eight times in a row. The story may be apocryphal, but it is not inconceivable. Long runs, including fantastically long runs, do happen. But the point to keep in mind is that they happen rarely. If you insist on waiting for them, the strain on your gambling capital is going to be too great. You will go broke before your long run happens.
In probability law, you would have to spin a roulette wheel about 268 million times in order to have an even chance of seeing a run of twenty-eight reds. If you insisted on waiting for that run of twenty-eight, you would have to watch a lot of money go down the drain.
Of course it is nice to dream about betting on such a run and winning. If you started with a bet of ten dollars and let your money ride, so that it doubled with each coup or spin of the wheel, you would end the run of twenty-eight successful coups with an amount not far short of $1.5 billion. That is considerably more than the net worth of any casino in existence. Casino rules about the sizes of permissible bets would forbit such an outcome, but it certainly makes for a fun-filled fantasy.
On the other hand, if you let your money ride on red for twenty-ninth coup, you will lose the whole $1.5 billion, including your original ten bucks.
The problem with runs of luck is that you never know how long they are going to last. When a run has begun, you cannot know in advance whether it will be a long one or will end with the next coup.
One thing you can know, however, is that short runs are very much more common than long ones. The sensible thig to do is ride the run until you have a good but not enormous gain, avoid greed, and get out early.
And don’t fret if the run continues without you. Sometimes it will, and when it does, a few people will end up with very big gains; but in all likelihood they will turn around and lose those gains in short order, for they are not the kind of people who enjoy consistent good luck. The consistently lucky are the run cutters.
One of the oldest and wrongest pieces of advice you hear around Wall Street is “Cut our losses but let your profits ride.” There is nothing wrong with the part about cutting losses. Indeed, we’ll study that under the Fifth Technique: luck selection. But the last half of the old adage, the part about letting profits ride, is a recipe for bad luck.
Of course Wall Street is not a roulette wheel. If you are playing rouge or noir and let your profits ride, you stand to lose everything instantly when the wrong color comes up. Runs of luck do not end so abruptly when you are speculating in stocks, real estate, rare coins, or other changeable-price entities that may attract you. They may end quite abruptly if you are heavily margined, that is, you finance your speculations with a lot of borrowed money. But if you are ordinary cash speculator like most people, a downturn in the price of your stock or gold bullion won’t necessarily bring total disaster. You don’t lose your whole wad. You lose only the value off the top.
With that in mind, the old dictum about letting profits ride might sound like acceptable advice. You’ve bought a bundle of stock, we’ll say. The company, Gee Whiz, is a manufacturer of doodads, thingamabobs, and other useful products, which your broker believes will sell well during the next twelve months. He shows you a lot of portentous looking economic analyses to back up his view. So all right, you decide to take a chance and load up on Gee whiz stock at ten dollars a share.
By sheer blind luck, your broker and his economic analysts turn out to be right. The stock price advances to fifteen dollars. You are in on a run of luck. What should you do?
“Let your profits ride,” solemnly counsels the fellow across the hall at work. This chronic loser is so consistently unlucky that he can’t even get out of a Friday night poker game without leaving all his pocket cash behind. He never had any profits and doesn’t really understand what it might mean to let them ride. But he does have all the cliches committed to memory and can recite them in appropriately businesslike tones.
So you think: All right, I’ll take the advice and ride this run of luck as far as it wants to take me. I’ll ride it to its very peak! And when it tops out, I’ll take my profit and run.
That is what you think. It sounds logical, and it sounds easy. It sounds particularly easy to the fellow across the hall, who never actually did it.
The fact is, however, that it is damnably hard. Indeed, for the majority it is so hard that it effectively is impossible.
What happens is that, having signed on for a long run, you work yourself into a psychological state in which nothing else will do. You trap yourself into waiting for the long run, which, nine times out of ten, isn’t going to happen.
Very few people ever make money consistently on Wall Street, and my observations convince me this is one of the main reasons why, if not the reason. Beginner come into the market, hear that silly advice about letting profits ride, attempt to carry it out, get flattened, and finally withdraw in weary discouragement. They end up with their money in savings accounts and money market funds – which, as we’ve seen, is no way to get lucky. The losing process typically begins with what could be a modest win or even a pretty good one. You’re sitting there with your handful of Gee Whiz stock, which you bought at ten dollars a share. It jumped to fifteen dollars, then to twenty dollars You’ve doubled your money! You really ought to be out of the game by now, but you’re operating on the basis of letting profits ride. You have your sights set on a long run of luck. Maybe the price will go to thirty dollars, you think hopefully. You’ll have tripled your money!
Unfortunately, the bottom drops out of the thingamabob market, and the price plunges back to fifteen dollars. You think: “This must be the end of the dip. It would be a mistake to sell out now and risk getting left behind. Suppose it quadruples? I’ll kick myself!”
It doesn’t quadruple, it sags to ten dollar, the price you paid for the stock. Now you’re furious. You feel cheated “I’ll be damned if I’ll let go of this now!” you tell yourself. “This stock owes me! I’m going to hang on until it pays off!”
So it collapses to five dollars.
And that is how losers are made. Bernard Baruch, a supremely lucky man, cut a lot of runs by selling all his stocks in the middle of a thundering bull market in 1928. H had made a lot of money and saw no good reason to go for more. Many speculators did go for more. Hanging on for longer runs, they all went down the drain in the crash that began in 1929.
Later in his life, Baruch was asked the question that all outstandingly lucky people are asked. What was the secret of this success?” He replied, “Not being greedy.”