The Profit Principle of Smart Gamblers

Disclosure: I’m not a big gambler.A? I’ve never ever won more than $20 at a Casino. I’ve never lost a lot either. Except once.

I’m playing roulette in a casino in beautiful Goa. The roulette ball lands on Red 7 times in a row! The crowd goes a little crazy. People start betting wildly on Black! I’m one of those people.

The ball is rolled again. And again it lands on… Red!

The house wins a bucket load of money.

The people place their bets once again. All money on the Black. To recoup their money, some people double their previous bets!

And once again the ball lands on Red!

Deja vu… Once again bets are placed on Black. Once again people double their previous bets. And once again the ball lands on Red!

What are the odds?!

You should have heard the cry of anguish in the casino after the roulette ball landed on red 10 times in a row!

The ball landed on Black on its 11th ride on the roulette. But by that time, no one had any money left.A? All the players had doubled their way to bankruptcy!

That day taught me an expensive lesson that smart professional gamblers and stock brokers know:

Cut Your Losses Early. Let Your Profits Roll.

Doesn’t matter what the probability says. Doesn’t matter what everyone else is doing. If you’re making a loss, you should cut it out quick. Because more important than the chance of making a huge killing is: taking care of your downside and making sure you can always play the game!

Conversation with a Website Gambler

I was recently reminded of this situation during a phone call. A person – lets call him Mark – calls me and asks me if I can help grow his website traffic. His website has all the bells and whistles. Mark had hired someone to create a website using all the latest buzzwords. Web 2.0. Ajax. Social networking. His site has it all.

What it didn’t have was a way of making money.

My response to Mark was: Traffic generation is easy. I could do that. But how was he going to convert the traffic and make money?

And his response: Oh once the website becomes popular, the money will somehow emerge automatically. Mark gave me an example: Google didn’t have a way of making money either when they first started out!

My suggestion was easy: Either find a way of monetizing the website. Or get out right now. Google had resources that you and me don’t have. They had venture capital funding to the tunes of millions. They could make million dollar losses yet stay in the game. But we can’t. We would go bankrupt if we follow the Google strategy.

Because Mark had invested a lot of his time and money already, he didn’t like my advice. And that is the problem: because most people invest a lot in their projects, they won’t get out of it even if they keep on making losses!

But you have to cut the ropes of an ugly project – or you’ll be dragged down along with it!

Action Summary:

• Does your blog have a way of earning money? If not, then without wasting more time, sit down and start thinking of ways to monetize your blog.
• Are your advertising sources profitable? If not, stop spending money and get out now. No amount of further effort will convert a poor advertising source profitable.
• Is your employee a slacker? Let him go now. Don’t wait and pray for him to get better.
• Is one of your clients taking a lot of your time – but you are holding on to him just because he could start sending a lot more business to you? Fire him!

Cut Your Losses Early! Because, chances are: you’ll lose your shirt before you can win the big promised paycheque.

If you liked this post, buy me a beer. (Suggested: $3 a beer or $7.5 for a pitcher)

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Posted by Ankesh Kothari under Stratagems on 13 Aug 2007
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