In the mid-1970s, I had moved from Jack’s firm to a commodity house, Hentz, but that didn’t work out, so I decided to go out on my own. I started off by raising small funds and got several investors in the $50,000-to-$100,000 range. I did a few of these funds, and they performed extremely well, which gave me a small track record of success.

But getting to the next step was a challenge. I didn’t have a big name, and I didn’t have big connections, so getting big money under management was tough. Even proving I could double people’s money wasn’t enough. And when I mentioned the word futures, people would think only maniacs do that. Plus, I was betting across commodities markets, and people felt that was even riskier, no matter how well I made the case that it in fact was less risky mathematically than the stock market, because it was diversified.

I realized I needed to offer customers something to get them in the door—a kind of gimmick. One day, I happened to pick up a 12-page booklet in a local brokerage firm. It covered the tax implications of options trading. That weekend I was at Fire Island. I left my friends and sat on a dock for three hours trying to read and learn it. It took so long not only because of dyslexia but because of the way law is written—everything refers to something else. When I got through it, I understood I could create a partnership so my investors could convert ordinary income into long-term capital gains on their tax returns and save an enormous amount of money. This was back when the top income tax rates for Americans were at 70 percent. Capital gains tax rates were much, much lower. Depending on the particulars, it could be as much as a four-to-one write-off, meaning that investing one dollar in my fund allowed someone to write off four dollars of income. I also saw a way to change losses from being counted as capital losses to ordinary losses, which were better deductions. Understand all of this was totally legal. Big financial firms did it all the time.

I took this concept to my attorney Simon Levin. (Our joke is that I am a pretty good tax lawyer.) He looked into it and confirmed it was possible; then he did the legal work to make it happen. When I worked with Simon, it was one plus one equals three.

This was a major turning point for my company. Our offering was unique, and it highly incentivized investors to bring their capital to me. This did the trick. Soon we had $5 million under management and then $10 million, and other firms were trying to copy us.

In the early 1970s, pork bellies—which, by the way, is where bacon comes from—were attracting huge amounts of trading. The market had only started a decade earlier when meat-packers came up with the brilliant idea of pressing pork stomachs into massive 40,000-pound frozen slabs (bigger than some houses). Hog farming had always been volatile, but now with a standardized frozen unit, meat-packers could warehouse their product for long periods and better control their supply and protect themselves from gluts and shortages. For those younger readers who don’t remember, those two words “pork bellies” were made famous in the film Trading Places with Eddie Murphy and Dan Aykroyd, and other places in popular culture as a catchword for how commodity markets worked.

Not long after I got started in “bellies,” I noticed a trend: If you bought in the fall and sold in July, you made money. No expert I asked could explain why this was true. I started to read books and studies on meat manufacturing, and I found out that Americans consumed a lot of bacon during the summer because of the popularity of grilling and, of course, BLT sandwiches. This explained the increased demand. But I also learned that during the summer, supply dropped because more pigs perished during transport in overheated train boxcars. But remember, I don’t look at the market and tell it what to do. I let the market tell me what to do. At any rate, I verified everything and got ready to execute this trade idea.

The problem was, I had very little money. So I took an OPM approach—as in other people’s money. I asked people to invest. Remember that most people don’t have the time or expertise to know how to invest, but if you’ve done your homework and have a well-thought-out idea with good odds in your favor, you can convince people to take a chance on you and get your first investment capital. So many people get their start this way, whether in the markets or launching a business. A guy asks a hundred people to help him start his first restaurant. Seventy-five say no, but twenty-five say yes. A couple of decades later, he has built restaurants from coast to coast. It wouldn’t have happened if he didn’t have the chutzpah to ask people for that initial investment. This is how I made my first big trade, too. I raised about $100,000 by going to family and friends and asking them to invest with me on my pork bellies trade. I put 10 percent up front myself and charged them 20 percent for performance. That meant I stood to gain 30 percent while putting up only 10 percent of the cash. My plan worked. I more than doubled our money and then some—$100,000 turned into $250,000—a huge amount at the time. Trading like this came very easily to me because I could accept being wrong. But I also loved the speed of that trade. It was like I had dropped a Mercedes engine into a Ford and I was off to the races.

• • •

However, I was shocked to discover I did not feel great happiness at making all this money. In fact, I felt great fear. All my life I’d been limited by disabilities. Now I had defied all expectations and won big. I’d have no excuses anymore for not being successful. But that was the heart of my problem. I could now feel the expectations rising both inside myself and from others. Even my girlfriend at the time started ratcheting up the pressure, telling me that now we had enough money to get married. (I didn’t want to do that.) I was simply not ready for success. I suspect I was afraid of having maximum freedom. Being able to do anything can be very oppressive. Now who do you blame for your mistakes? What if you make a choice and you don’t like it? Now you have to make your own happiness. Money ain’t that hard, but happiness? That’s a whole different story. I wasn’t ready.

So naturally, I went right out and lost all that I’d won.

Next, a colleague who worked in corn commodities came to me with his plan for a big trade and tried to get me to join him. He said we couldn’t miss. He knew a lot of facts about corn and seemed on top of it, so I trusted his judgment and followed him into the trade. Turned out he was wrong, and I had risked a lot more than I had.

In fact, the bet had been a good bet, in theory, but widespread rains triggered one of the biggest crops in history, which sparked a record drop in cash corn prices. A drought would have wiped out large sections of the crop.

I watched in horror while corn futures began plummeting. Minute by minute my money disappeared before my eyes. I was heavily leveraged with a huge bet, on my way to owing more money than I had. If the loss was too big, I knew I might never recover.

I was so desperate that I walked out of the office into the stairwell. Even though I’m Jewish, and Jews don’t kneel, I got down on my knees and prayed: “God. Please don’t give me a debt,” I begged. “I don’t care if I don’t make money, please just get me out even.” At that moment, a bunch of guys from Switzerland came down the stairs and were startled to see a young man in a frumpy suit kneeling and praying. I must have looked ridiculous.

“Sir, do you need some assistance?” one of them asked.

I stumbled to my feet. “Thank you, no.” Then I went back into the office to face my fate.

Corn prices recovered enough so I did eventually break even. I have no idea how it happened. Maybe God answered, or maybe it was luck. No matter. That trade was a huge learning experience. For one thing, I took the corn guy’s tip on faith without doing any of my own research. But more important, it was an enormous lesson on risk. I realized I had bet far more than I could afford to lose. I had placed my bet considering the upside (as so many people do), rather than the worst-case scenario. I vowed never to do that again. Don’t forget, lesson number one is to get in the game. You can’t win the lottery if you don’t buy a ticket. But lesson number two is equally important: If you lose all your chips, you cannot bet.

FOOLS RUSH IN

After my corn debacle, I never wanted to be on my knees again. I learned the hard way that I had to respect risk. That meant arithmetic—not prayer—because it was clear to me that successful trading was all about odds. I wanted to compute those odds and then test them with various investing strategies to figure out what would beat the market. My goal was to build a model based on probability.

I was looking for angles that would put the odds of winning more in my favor. And in this way, I got interested in the emerging field of game theory, which, simply put, is the study of a strategic decision making. Game theory uses mathematical models to predict interactions among players who are operating under set rules. It presumes that all players are rational and will act in their own interests. You could say that game theory has been around in some form or another since ancient times when generals planned their battles, but the theory became formalized in 1944 when a mathematician, John von Neumann, and an economist, Oskar Morgenstern, teamed up to publish their paper “Theory of Games and Economic Behavior.” Since then, academics and businesspeople have applied game theory to every possible field: philosophy, psychology, politics, auto insurance, marriage, evolutionary biology, the arms race, and yes, of course, poker, too.

In the early 1970s, I went to the NYU science library and read as many books as I could on the topic. My goal was to publish a paper that would increase my reputation and credibility. Most of the books I found were filled with advanced mathematics that might as well have been hieroglyphics as far as I was concerned. I had to rely on the prefaces, which summed up the material. Still, I understood what I wanted to say, which was that to make a good decision, you need to know where you are and what your choices are. I was not a mathematician, so I needed to find someone who could check my ideas. In fact, throughout my career I always needed quantitative people and computer experts who could execute my ideas. Because I had no money at the time, I was happy to share credit or give people equity rather than pay them.

In 1972, I met Steve, a young quant who’d just graduated from Tufts. He and I copublished an article, “Game Theory Applications,” in the Commodity Journal. It became a pretty big deal, because no one had written a proof of how game theory could be applied to trading futures, but this is what we did.

We began by quoting Albert Einstein, who wrote that his special theory of relativity had been based not on speculation, but rather on “a desire to make physical theory fit the observable facts.” The key words here were “observable facts.” We wanted to use this approach to determine probability. As we explained in our paper:

We would look at a set of observable facts, or a single fact, which is followed by an event. Then we count the total number of times that those observable facts occurred, and divide by the number of times that these facts were followed by the event. That’s how probabilities are done.

In other words, if you think the market will act a certain way under certain factual conditions, test it a thousand times to find out the odds.

Next, we considered that games always have a set of rules. The rules benefit somebody at some time and determine the only alternatives available. For example, once cards have been discarded, you can’t go back and see which ones they were. That’s the rule. You have to watch and remember them in order. Another example: Some people get to go first, second, or last, and so on. Each of these positions convey certain advantages and disadvantages. One thing people fail to understand about professional athletes is how well they know the rules and try to use them to gain advantage throughout the course of a competitive contest. And we were thinking just like pro athletes.

Then there were the possible moves. Game theory showed that you have three alternatives: call, raise, or fold. Assuming you have monitored the options, what are the odds of winning with each of those options?

The point of our paper was this: Taking into account the (1) observable facts, (2) the rules of the game, and (3) the available three options (call, raise, or fold), you get a chance to pick—without much penalty—when and if to bet. Time, is therefore, a powerful tool in your arsenal.

To show the time horizon in action: Let’s say you are playing blackjack and you’ve got 17 in your hand. You need a 4 to win, but you’ve already seen two 4s come and go. So what’s the chance of you getting one of the two remaining 4s? Pretty bad. Let’s say you have a 1 in 20 chance. That means that it can happen, but it’s not a good bet. Don’t take it. Wait for a better bet when the odds are in your favor. This is what I mean when I say that you control the timing of your next bet. This is your advantage as a speculator.

At a casino poker table you have to put money in the pot before you see what happens. But as a speculator trading commodities futures, you don’t have to do that, because you don’t have to play the market at all to see what will happen. You can watch until you see the best probability of value and then choose your moment of entry. Has a stock or commodity been on the rise for the six months? Has the 30-day average of a particular commodity been reaching a threshold to prove you have a rising trend you should follow? If not, then wait. Then when it crosses your threshold, only then, you buy in and follow the trend.

Understanding your time horizon makes for an amazing life skill. Should I marry this person? Do I buy this house? Do I take this job? Should I retire? These are all important bets. If you have leeway as to your when, then you have powerful advantage. You can time your bet for the circumstances and timing when you have the best odds of success in your favor.

• • •

BETTING FOR THE BIG WIN

So by now, I hope I’ve made it clear that making room for losing and respecting risk are cardinal rules. But here’s something just as important. You have to always be on the lookout for bets that have a huge payoff without huge risk (we call this asymmetrical). Remember, if you’re always winning but winning only small amounts, then you aren’t really winning anything.

Here’s why: Playing a small game all the time is not safe. If you have only small gains, you won’t provide for the many small losses you are going to have. See, I make my money in chunks. The average person, not yet aware how the game really works, always goes for steady small money because it seems like a safe bet. The problem is that this is not as safe as it seems, because if you don’t have a lot of money, you’re not protected from those losses that inevitably come—whether it’s a bad trade or a sudden health problem or whatever. What if you get cancer and a drug that is a guaranteed cure costs a quarter-million dollars? If you don’t have that money, you did not play it safe at all.

To make big money, you have to always bet on something that has a potentially large payoff. If you do this regularly, then eventually the odds will work in your favor and you will win big over time. This is why you should always be on the lookout to bet on an ultra-powerful opportunity. These don’t come along every day, but when they do, you have to be in. This is what I mean by a horizon of opportunity—a time when we have the chance to make a major win that can change everything about our life right now.

In the mid-1970s, I found one such major opportunity in the coffee market. At the time, prices were extremely low; there was a glut of supply, and farmers were getting killed. After researching 50 years of weather patterns and supply/demand data, I saw that coffee consumption had been rising for a long time, but prices hadn’t yet responded. I was sure they had to, so I went and bought calls on coffee option futures, betting their value would rise. I was not focused on the size of the return but on the odds that one of the world’s most beloved beverages would rebound in value.

The odds were very good, so I decided to bet one million dollars over the course of a year. I did this by buying options $250,000 at a time, which was the equivalent of what I was earning every two months at trading. This was a big bet for me at the time, but I asked myself if I was prepared to lose it. The answer was yes. I was prepared to take the loss if the trade went bad, but I had done exhaustive research about the trend that pointed in one direction. So probabilities told me my bet could net a big gain.

There are two kinds of bets: a good bet and a bad bet. A good bet is defined as having a high probability of making more money than you are risking, A bad bet is when you risk a lot for small or limited gains. As a speculator you should be in the good bet business.

At the time (early 1975), coffee was trading at 60 cents. A year later, it was up to a dollar. A year later, it was up to two dollars. Very good friends of mine would call and say, “Okay Larry, you have made enough money. You’re up to $6 million. Cash it in.” But I said, “No. The trend is still going up.” There was a 32-year-old guy at the trading house working at the computer watching it and he couldn’t handle the stress. But I rode the trend from 60 cents to $3.10 and my initial $500,000 went up to $15 million. When the trend reversed and went down I got out with $12 million. Emotionally, it was a major moment. I was 35 years old, and I had $12 million dollars. No one in my family had ever had $12 million. This was a life-changing breakthrough for me.

Yet inside of me a voice was saying, “It can’t be this good.” I was emotionally not ready to be a big winner. Some people love success and can never have enough. But when I got that big hit. I said to myself, I can’t do that again, $500,000 to $12 million in a year? What are the odds of that happening again? Instead of working out why that worked, I said to myself, “Boy, you were lucky.” There is truth to that. Philosophically speaking, I was lucky. When you talk to refugees who escape from their home country horrors, understanding the role of luck becomes very clear. If you were born in Syria and your house is bombed to shambles, it’s hard to have a dream. I recently visited Cambodia and saw the killing fields where Pol Pot slaughtered up to three million people. It makes you realize that even if you are born into a lower-middle-class American family, you already beat some amazing odds. So I figured that considering I had hit the lottery in the first place, and then made a giant leap to living in a mansion thanks to this huge coffee trade, I’d gotten as lucky as I could hope for. So I laid a little bit low for a couple of years. I bought a nice house for my family. I did my normal trading, which was very satisfactory and made me a living.

In retrospect, coffee taught me something I want my kids and grandkids to know. If you play in a big game in an intelligent way, you can make a lot. If you are in a game where you can make a lot of money, you have to accept it.

I was prepared to bet $500,000 because I was willing to lose it, and I had some idea that I could make $3 or $4 million dollars on the $500,000, but it turned out to be much more. Now it would be a while before I’d really learned to accept this, but sometimes, you get more than you thought in life.

BEATING THE ODDS OF DATING

Long before the dating books of today, the ones that teach about odds and games, I decided to apply my investment strategy to my dating. And just as with investing, you can’t win if you’re not in the game. The problem for me was that in dating, the first bet people take is usually based on looks. I was not good looking—that was a simple fact—and therefore a social scene of a party or bar was not a great place for me to succeed with gorgeous women. So I came up with an idea to play the game differently in a way that increased my advantage of at least getting to the first bet. First step? I went to shopping malls because that’s where women strongly outnumber men. Then I kept my eye out for an attractive woman who was by herself looking a bit bored or perhaps on a lunch break. I’d go up and ask if she’d like to have a coffee. Since it was in a public place, it was safe, so this was not a ludicrous suggestion. About one in four women said yes.

Then we’d have coffee. I was sure to show an interest in them and not talk about myself—also putting odds in my favor. If we got on well, I’d take the next step and ask them out to dinner. Only one in three would say yes to dinner. If that went well, we’d start dating. Using this method, I drank a lot of coffee and dated a lot of fabulous women. If someone is having trouble dating the right people or even dating at all, putting the odds in your favor like I did will always work.

I didn’t meet my wife Sybil at the mall, however. I met her on Fire Island one summer when I shared a house with friends. She was one of my roommate’s guests, and the first time we met we wound up talking all night. On our first date we spent the whole evening laughing together. She thought I was funny, and she liked to laugh. Things continued to go well. We both wanted children; so we got married and had two wonderful daughters. Sybil was a very proper British woman who came from a family of socialists. Both she and her mother were social workers. She and I were very different from one another. I used to say to her that we are both in the social work business at different ends of the spectrum, “I help very rare people, the rich, while you help the people who are more common—the poor.” One person gave the other a different view of the world, and we had quite a good marriage for 32 years until she passed in 2008. In the next chapter I will share more on how my approach to trading also works for love and marriage. For now, suffice it to say that I made a great bet on Sybil.

• • •

I hope you find value in the fundamental insights that go into my method. It relies on following the trend. It suits me and who I am. I don’t like to stress myself. For me, trend following is simple and it works. And it has made me a lot of money.

This method is also aligned with my strengths, and soon it was easy to turn it into a positive system. The result is I have invented my own bias based on a novel method that works for me. That’s why I use so many examples based on my personal experiences. Since I know what happened in my own life, all of this is verifiable—I have lived it.

But as I experienced success, I would sometimes ask myself why it happened. Many years later, I was at a table with colleagues in England after we’d all made many millions on the Mint Guaranteed Ltd. Fund I’d launched. These guys were generally of the Cambridge and Oxford ranks, and I went around the table and asked each one, “How much smarter are you than your father?” Each of them said that they weren’t smarter, or not much smarter, than their fathers. I replied, “Then why did we make ten times more money than our fathers ever made?” I told them that we’d launched beyond our fathers’ genes, not because of our brilliance, but because we’d placed the right bet where our risk was minimized and the upside was great. It was an issue of technique. It was about a rule. This is why when bets are placed correctly, enormous life gains are possible.

You have a choice as to whether you set your priorities and place bets to achieve them, or have your life dictated to you by events. You must use all the tools in your arsenal to put the odds in your favor. Timing is an edge; use it to place your bets strategically. And the size of your bets plays a huge role. At the outset of each major move, ask yourself, “How much can I make?” Because the payoff has to be worth it, right? And finally, “How much can I lose?” Because you don’t want to bet your deli to win a pickle.