# Rolling The Dice... And The Proof Of God

“Never invest on a level playing field,” Doug Casey told me. This advice came back to me as I read Peter Bernstein’s book, Against the Gods. It is a history of the mathematics of probability. And one of the first things we learn is that toting the odds on anything is not a simple matter…and that figuring out investment probabilities is particularly difficult. Even when the odds are even, for example, it is not rational for you to play the game — at least, not from a strictly financial viewpoint. This is because of something known as the Petersburg Paradox developed by Daniel Bernoulli in the early 18th century. His cousin, Nicolaus, had proposed an idea which is the equivalent of the principle of declining marginal utility of money. That is “the utility of any small increase in wealth will be inversely proportionate to the quantity of goods previously possessed. ” This insight led to the realization that when you win at a game of chance…the amount won will be worth less to you than the equivalent amount lost. You can see this by imagining yourself with \$5 million. In a single hand of liar’s poker you have the chance — with even odds — of either winning another \$5 million, or losing the \$5 million you already have. It would be great to win another \$5 million. But it wouldn’t change your life very much. On the other hand, going from a net worth of \$5 million to a net worth of \$0 would be a major change. Ergo…it is irrational to play the game. If you win…you win big. But if you lose…you lose bigger.

Ultimately, there was no way to know. But there were, like the difference between bull and bear markets, only two answers — either God exists or doesn’t. So, Pascal looked at the costs of one decision or the other. If he believed that God existed, and he led his life accordingly, he may be disappointed. But if he led his life as though God didn’t exist…and it turned out he was wrong…he would surely roast in hell. Since the latter cost was higher than the former…and the odds were 50/50…he had little trouble deciding the issue. The hope of heaven is the hope that people will get what’s coming to them. Maybe the market will go up…maybe it will go down. But I see a lot more to lose than to gain. Even at the fantastic rate of 15% upside profit…there’s a lot more than that on the downside. And even if it were a 60% probability that the market would go up rather than down, as we saw in the example of the gambling Ph.Ds, you would be crazy to put all your money in stocks. But that is exactly what people are being urged to do. Surely, if there is a God he will make sure that the people who urge you to put all your money in stocks roast in hell.

Bill Bonner

Paris, France July 27, 2000

*** As you know Bill’s floating with his family on a painfully slow ferry somewhere between Cherbourg, France and Waterford, Ireland. I’m told by his son Will, who’s still with me here in Paris, that the family’s off seeking distant relatives in the Irish town where Will’s great grandfather lived… before he fled to the more stylish digs of a Pennsylvania steel mill.

*** In the meantime, here’s what I propose: I’ll run the numbers for you briefly, then treat you to another rousing edition from the vast supply of Daily Reckoning Greatest Hits, 1999. Sound good? If you’re interested, stick around. If however, you’ve got more important things to do…like wash the family cat… this is your cue: skeedaddle.

*** Mr. Bear took the day off from sunning himself at the beach when he heard yesterday’s earnings reports: “Stocks Punished for Disappointing Results” is how a Reuter’s headline scribe phrased it. The Dow fell 183 points… a loss of nearly 2%, and its worst day in two months… finishing the day at 10,516. Down 8.5% for the year.

*** Less than impressive earnings in the semi-conductor industry are being blamed for the losses. But one analyst in the Reuters article thankfully stated the obvious for readers of the Daily Reckoning, at least: “Everyone is suddenly realizing that the last couple of years of profit growth we have seen cannot last forever.” Really.

*** That startling revelation weighed heavily on the Nasdaq, too. The great incubator of optimism and New Era exuberance gave up 41 points to close just over 3,987.

*** 1363 shares advanced, while 1474 declined on the NYSE.

*** The S&P 500 also fell 22 points to 1,452.

*** Bad news for Will and his CD burning friends, too. Napster, Inc. – the website where young techno-wizards have been congregating to pirate music from their favorite rock bands – was ordered shut down by a federal judge. No worries though, Will assures me, once I get my own “burner,” I’ll still be able to find plenty of Grateful Dead bootlegs out on the ‘net absolutely free, gratis… no cover charge needed.

*** On the other hand, reports filed by Amazon were optimistic. Although Bezos and crew are now losing 91 cents a share – double the 43 cents/share loss reported a year ago – they’re not losing as much money on each sale as analysts had predicted. Good news. Still AMZN fell… down nearly \$4 in after hours trading to settle at \$33.

*** Meanwhile, “if you can show a monthly income of as little as \$1,000…or \$2,000 from investment income… you could retire next week,” writes Kathy Peddicord from Belize. A law recently passed there allows you to “virtually retire,” live better than you ever have – even pay no taxes.

*** On this day in 1866, Cyrus Field helped usher in one of the “first order” innovations of the communications age. After two failures, he succeeded in laying the first underwater telegraph cable between North America and Europe.

*** Look for GDP numbers… they come out tomorrow. We expect more fuzzy logic and hedonic measures.

*** Allright then… onward and upward: “Rolling The Dice… and The Proof of God” below… was written over the course of several days during the first week of August, 1999.

Thanks for sticking around… Bill will be back soon – I promise,