Lesson 16: Less is often More
One of the greatest chances you will ever have for making a profit
when wagering a bet at the casinos of Las Vegas or at the tables of
Baden-Baden in Germany is to bet all your money on 'red' or 'black'
and, if you win, quit betting.
Likewise, the most certain way to lose all your money when betting at
Las Vegas or at the casinos of Baden-Baden is to wager all your money
on 'red' or 'black' and, if you win, to then leave all your money
continuously on the line. If you place a $1000 bet on 'red', and it
comes up 'red', you have $2000. If you leave your money on table and
'red' comes up again, you have $4000; $3000 of which is pure profit.
The longer you continue to bet on 'red', however, the more certain
you are to lose. With time, betting steadily on one color means
absolute certain loss. If it did not, the casinos could not remain in business.
In making a bet where the odds are near 50/50, such as on the
roulette table, the best chance you will ever have for doubling your
money is to take your $1000, bet it once, and if you win, quit. The
longer you play, the more certain you are to lose. Time and
mathematics are working against you.
There was a French philosopher once, (Cardinal Mazarin, 1602-1661, a
French minister of state) who said, roughly, "with time as my
ally, I will take on any man". ("Time and I against any
two" was his exact quote). The casinos of the world operate on
this same philosophy. Time works against all gamblers. The longer you
play at a game where the odds are less than 50% in your favor, the
more certain you are to lose your capital.
That is one of the reasons I emphasized in my last lesson that it is
valuable to know the 'odds' of any futures or options position before
taking a futures or option position. If the odds are 25% in your
favor, and an alternative trade offers you 80% odds in your favor,
time is more likely to be on your side in the 80% probability trade
than it will be in the 25% probability opportunity. To learn how to
calculate the odds or probability of success for any futures or
options position you ever take examine the formula I set out for you
in my Commodity Trading Manual. This formula
should serve you well.
When committing your capital in futures or options or anywhere else,
remember this rule. If the odds are less than 50% in your favor and
you plan to let your entire capital ride with your position, the less
time you spend with your investment, the greater the outcome will
often be. Less is often greater. Time is your enemy when you
have a probability of success at less than 50%.
When the odds are greater than 50%, time can often be your friend. In
fact, sometimes you are not so much buying a futures contract or an
option position as you are buying 'time'. Think of the recent move in
sugar prices. Suppose that you were able to buy a sugar futures
contract or a call on a sugar contract when prices were 3 cents a
pound and where the contract or the option did not expire for 5
years. Are you buying sugar futures or sugars calls or are you really
just buying 'time'?
Let's look at two scenarios. Suppose sugar is priced at 43 cents a
pound and you can buy a five-year sugar futures contract or a
five-year sugar call at 43 cents. Suppose that only twice in twenty
years has sugar been selling above 43 cents. The odds are 10% in
favor of your position. The longer you stay with a 10% favorable
position, the greater the probability that you will lose all your
money. You don't want to buy time when the odds are 10% in your
favor. With odds less than 50%, time is your enemy.
But if sugar is priced at 3 cents and in the last twenty years you
can find no example where sugar has ever remained at 3 cents or lower
for a five-year period of time, the odds are now greater than 50% in
your favor. With such odds, buying time makes sense. You are not
buying sugar at 3 cents; you are buying five years of time. "Time
and I against any two".
When probabilities are less than 50% in your favor, the less you
trade - the better off you may be. In these situations, less probably
means more. Time may be your enemy. The more time spent trading, the
less success you may have. The less time spent trading, the more
success you may have. Less trading can often mean more success.
However, when probabilities are substantially in your favor, you may
come to view time more favorably too. When taking high probabilities
positions, you will not be in a hurry to end your trades and take
short-term gains. In such situations time may well be your best friend.
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