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The Dark Side of Student Loans
Issue #528, June 25, 2018

The Cost of Out-sourcing Convenience
Issue #527, June 18, 2018

Social Security: 66 or 70?
Issue #526, June 11, 2018

Student Loans: There’s (Unfortunately) a Lot More!
Issue #525, June 04, 2018

Co-signing a Note
Issue #524A, May 31, 2018

The Knight Frank Luxury Index and Collectables
Issue #524, May 28, 2018

The Importance of Diversification: The Myth of Diversification
Issue #523, May 21, 2018

How to Save Thousands on Your Food Bill
Issue #522, May 14, 2018

MoviePass and Other Things
Issue #521A, May 10, 2018

Degree Inflation, Long Training Periods, and “Certification”  Part III
Issue #521, May 07, 2018

Degree Inflation, Long Training Periods, and Certification” Part II of III
Issue #520, April 30, 2018

Follow-up on Several Things
Issue #519A, April 25, 2018

Degree Inflation, Long Training Periods, and “Certification”: Part I of II
Issue #519, April 23, 2018

The Kids Birthday Party Hustle
Issue #518A, April 18, 2018

A Pension Question: Part II of II
Issue #518, April 16, 2018

A Physician is an Executive
Issue #517A, April 11, 2018

A Pension Question: Part I of II
Issue #517, April 09, 2018

Is the Correction Over?
Issue #516A, April 05, 2018

Used Car Dealers, Student Loans, the Chinese, and Uncle George’s Rule
Issue #516, April 02, 2018

Starter Homes
Issue #515, March 26, 2018

Redecorating: Beware!
Issue #514, March 19, 2018

NASDAQ Closes at Record High
Issue #513, March 12, 2018

A 40% Chance
Issue #512, March 05, 2018

Several Things
Issue #511, February 27, 2018

Human Capital, Education and Wealth
Issue #510, February 19, 2018

Another Stock Market Update
Issue #509A, February 18, 2018

Some Thoughts on Savings
Issue #509, February 12, 2018

A Stock Market Upfate
Issue #508S, February 10, 2018

Who Can You Trust? Part II of II
Issue #508, February 05, 2018

The Christmas Decoration Pre-worn Jeans Hustle
Issue #Interim Bulletin #507A, February 03, 2018

2018 Outlook for Financial Markets
Issue #507, January 29, 2018

Who Can You Trust? Part I of II
Issue #506, January 22, 2018

Life Insurance Settlements
Issue #505, January 15, 2018

Commodities and Buying the Breakout
Issue #504, January 08, 2018

Buffett Wins His Bet
Issue #503A, January 04, 2018

Practice Real Estate and Free Agency
Issue #503, January 01, 2018

Outlook for 2018: Part III: Stocks and Bonds
Issue #502, December 25, 2017

My Outlook for 2018: Part Ii: Precious Metals
Issue #501A, December 21, 2017

Outlook for 2018: Hard Assets: Part I of III
Issue #501, December 18, 2017

More Thoughts on Bitcoin
Issue #500A, December 14, 2017

Fees and Good Relations with Bankers
Issue #500, December 11, 2017

Salvator Mundi
Issue #499A, December 07, 2017

Should You Rent or Own a Home?
Issue #499, December 04, 2017

A Gift Subscription
Issue #Interim Bulletin #498A, December 02, 2017

Stocks vs Real Estate: Asset Allocation: Part II of II
Issue #498, November 27, 2017

When Good Enough is Fine
Issue #497A, November 22, 2017

Stocks vs Real Estate: Asset Allocation. Part I of II
Issue #497, November 20, 2017

The Saudi Arrests and the Perils of Foreign Investing
Issue #496, November 13, 2017

Gambling and Las Vegas
Issue #495, November 06, 2017

Some Tips on Auto Insurance
Issue #494, October 31, 2017

Bitcoin and the Digital (Crypto) Currencies
Issue #493, October 23, 2017

The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017


By Robert M. Doroghazi, M.D., F.A.C.C.

The Theory of Gambler’s Ruin

Issue #453, January 16, 2017

    Even if you don’t gamble (and I hope you don’t) you’ll find this discussion interesting. More importantly, it has general applications to your business and your personal investments. 
    Wikipedia: “The original meaning is that a gambler who raises his bet to a fixed fraction of bankroll when he wins, but does not reduce it when he loses, will eventually go broke, even if he has a positive expected value on each bet.
    Another common meaning is that a gambler with finite wealth, playing a fair game…will eventually go broke against an opponent with infinite wealth. Such a situation can be modeled by a random walk.”
    RMD comment: The casino always wins because.
    1) The casino will never run out of money. The player can.
    2) All games have a built-in advantage for the casino. Ex: even if you play perfect basic strategy in black jack and stick to the pass line bets with insurance in craps, the casino has at least a 0.4% advantage.
    3) There is no betting system that will beat the casino. The most frequently touted is to double your bet until you win. As described above, you will eventually be wiped out.
    Consider an obvious example. You take $10 to the casino, sit down at the $10 blackjack table, and lose the first hand. Unless you come up with more money, you are ruined.
    The concept is extremely important for professional gamblers to determine how much stake they need to stay in the game. Even the best gamblers have prolonged losing streaks. I read about a professional black jack player who had 11 losing trips in a row. Say your minimum bet on blackjack is $100, your average bet is $150, and you have a 2% advantage on your maximum bet of $500. You start with a total bankroll of 125 maximum bets = $62,500. Your chance of ruin is about 2-3%.
    You have the same bet range as above. You go on a 4-day weekend trip and play 4 hours per day (the amount generally required to get your room comped), 100 hands per hour. If you take $15,000, you still have a 10-15% chance of ruin for the trip. It happens.
    For perspective, $150 x 100 hands = $15,000 exposed to the house every hour. Times 4 hours per day = $60,000, x 4 days = $240,000 exposed to the house on the trip. On average, you will lose 0.4% of $240K = $1K. You lose two hands where you doubled your $500 bet. Instead of having $4,000 in your stack (the $2K you bet and the $2K you didn’t win), you are out $2,000, a swing of $6,000. Things don’t need to go that bad to get ruined.
    How does this apply to your investments?
    1) Think of gambler’s ruin as undercapitalization, which is the #1 cause of business failures: you can’t ride out the inevitable rough spots. Read My Years at General Motors by Alfred P. Sloan (see below). GM went into the Great Depression flush with cash. They not only survived, but continued to pay their dividend.
    2) The only sure way to go broke is to add to losing positions. Consider: you first bought at $50. You buy more at $40, more at $30. It goes to zero and you are broke.
    3) You don’t need many bad investments that represent even a modest amount of your net worth to go bankrupt.
    4) You must be careful about buying the dips. Are you buying low, or the abyss?
    5) Apparently small fees (the house advantage) add up over time.

    Felix Zulauf, my absolute favorite member of the Barron’s Roundtable, was on CNBC on Tuesday. He said there may be some weakness in the near term, like February or March, but it will be shallow, and then the market should rise into the summer, up about 10% for the year. He feels that at that time rising interest rates will begin to hurt. The market will drop in the fall and end the year lower. Zulauf also said, as he did at last fall’s Barron’s Conference, that this will be a trader’s market: take profits when you have them. 
    RMD comment: Zulauf is a smart guy. I thought the interviewer did a punk job: continually interrupting to interject his own opinions, cutting Zulauf’s time in half.
    Jeff Gundlach said something similar: that interest rates will rise, with the 10-year Treasury hitting at least 3%, and this would hurt the market.
    Bank of America (BAC) closed Thursday at 22.92. It announced earnings before the market open on Friday. It quickly traded up as high as 23.17. Some investors apparently weren’t as impressed, and just as quickly took the stock as low as 22.68. BAC opened at 23.20, traded as low as 22.80, as high as 23.41, and closed at 23.01, +0.09.
    RMD comment: The average investor has no business trading in the pre or post-market session. You will get clipped by the sharpies. If you do, it must be with a Limit Order to buy or sell. During regular market hours, Acme Sausage Co. may trade at 30.01 bid, 30.02 asked. Outside regular hours, it may trade at 29.00 bid, 32.00 asked. If you put in a market order to buy, it will get filled at 32.
    My mom met Alfred P. Sloan, arguably the greatest business executive of the 20th century. She worked at GM’s office in downtown St. Louis before the War, a very sweet job at the end of the Great Depression for a 20 year old girl from Madison, IL. She took the street car over every day. Sloan came in his private Pullman car, and gave a talk to the employees. On her own, she took his talk in shorthand. Sloan asked her what she was doing, and she read back his talk. He complimented her in front of all the other employees for her initiative.   
    I spent 2 ½ days at the Beau Rivage casino in Biloxi-Gulf Port on a free trip. As noted before, free things are often worth what you pay for them. Let’s just say it’s not Las Vegas. The elevator said capacity 3,500 lbs., 23 passengers.
    RMD comment: Considering the patrons, they need to knock that down to a capacity of about 15.

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