The Rule

1. Embrace Failure: It's Your Foundation for Winning

I won because I always expected to lose.

Failure was an advantage. Larry Hite, born with severe dyslexia and poor eyesight, struggled academically and athletically, feeling like a failure throughout childhood. This constant experience of failure, however, became his greatest asset, teaching him to accept that things wouldn't always work out and to quickly move on from setbacks. Unlike those accustomed to constant success, he wasn't paralyzed by the prospect of losing.

Comfort with loss. His early struggles ingrained in him a comfort with loss that is essential for trading and life. He learned that failure is just one discrete action, not a definition of self. This allowed him to quickly fold losing hands and seek the next opportunity, a crucial skill in probabilistic games like trading.

• Dyslexia and poor eyesight made traditional learning hard.
• Constant failure in school and sports was the norm.
• Learned to accept "striking out" as inevitable.

Know your flaws. Instead of trying to change who you are, work with what you've got. Understanding your limitations and embracing them allows you to develop strategies that mitigate your weaknesses and leverage your strengths. Hite's inability to read well forced him to develop strong mental math and imaginative skills.

2. Find Your Game: Passion and Profit Go Hand-in-Hand

Find the game you want to play and ideally choose to do something you love because that's a good bet for success.

Follow your curiosity. Hite stumbled upon commodity futures trading in a college class, captivated by the idea of high leverage and betting on price movements. While others saw only risk, he saw opportunity and a path to his goal of financial freedom, especially given his aversion to traditional work and sales. This spark of interest led him to pursue trading despite having no formal finance background.

Profit from leverage. His early ventures, like hiring homeless men to scrape door frames for a markup or trading pork bellies with borrowed money, taught him the power of leverage and making money from others' labor or capital. He realized that significant profit often comes from smart use of resources, not just hard work.

• Saw opportunity in commodity futures' leverage.
• Used "other people's money" (OPM) for early trades.
• Realized profit could be detached from personal labor.

Love what you do. Hite emphasizes choosing a path you love. If you are passionate about your work, it doesn't feel like work, and you are more likely to put in the effort needed to succeed. Trading became his passion, a challenging game of odds and human behavior that he found endlessly fascinating.

3. Know the Odds: Counting Trumps Prediction and Stories

Most trading, investing, and entrepreneurial success is about counting and odds, and you can do that if you have the will.

Markets are about numbers. Hite learned early that financial markets, despite the stories and hype, are fundamentally about numbers and probabilities. His experience with standardized tests and card games taught him to look for underlying mathematical structures and odds, rather than relying on intuition or narratives. He saw Wall Street's reliance on stories as a way to obscure the simple math.

Probability is key. Inspired by Edward Thorp's card counting, Hite spent time studying probability, even proving to himself that losing is sometimes inevitable even when doing everything right. This reinforced the need to manage risk based on probabilities, not predictions.

• Studied probability through card games.
• Realized losing is sometimes unavoidable.
• Focused on quantifiable odds over subjective analysis.

Good vs. bad bets. A good bet offers the potential to make multiples of what you risk, while a bad bet risks a lot for limited gains. By consistently making good bets based on calculated odds, the law of averages will work in your favor over time, even with inevitable losses. This applies to financial decisions, career choices, and even dating.

4. The Rule: Cut Your Losses, Let Your Winners Run

Cut your losses and stay with your winners. That is my credo for building wealth and achieving goals of all kinds.

Ricardo's timeless principle. Hite's core philosophy, named "The Rule" after economist David Ricardo, is simple yet powerful: when something isn't working, stop doing it quickly; when something is working, continue doing it. This principle is the foundation of trend following.

• Inspired by David Ricardo's "cut short your losses, and let your profits run on."
• Applied to trading: exit losing positions quickly, stay in winning positions.

Follow the trend. Trend following involves identifying assets whose prices are moving consistently in one direction (up or down) and betting that the trend will continue. Hite uses moving averages to identify these trends. The key is not predicting the future, but reacting to what the market is doing now.

Discipline is crucial. While the rule is simple, executing it requires discipline, especially cutting losses. Emotions like hope or fear can make people hold onto losing positions too long. A systematic approach helps enforce this discipline. Letting winners run is also hard; people often exit profitable trades too early out of fear of losing gains.

5. Risk Control is Paramount: Never Bet Your Lifestyle

You can't lose your shirt if you don't bet your shirt.

Survival first. The most important rule is to stay in the game. This means never risking so much on a single bet that a loss could wipe you out entirely. Hite learned this lesson the hard way after nearly going bankrupt following a colleague's bad corn trade.

• Near-bankruptcy from a leveraged corn trade was a harsh lesson.
• Vowed never to bet more than he could afford to lose.

Quantify your risk. Before making any bet, financial or otherwise, determine the worst possible outcome and how much you are willing to lose. This "assumption of wrongness" is your baseline. If you cannot afford the worst-case scenario, it is a bad bet, regardless of the potential upside.

• Always ask: "What is the worst thing that can happen?"
• Never risk more than a small percentage of total capital on one trade (e.ite. 1%).

Manage emotional bias. Fear and greed can lead to irrational decisions. By predetermining exit points (stop-losses) and sticking to a system, you remove emotion from the decision-making process, ensuring you cut losses quickly and protect your capital.

6. Leverage Asymmetrically: Bet Pennies, Win Dollars

Essentially it means that what you risk and what you can gain are of dramatically different weights.

High potential, low risk. Asymmetrical leverage (AL) is about finding opportunities where the potential upside is vastly greater than the downside risk. Hite sought out situations where he could risk a small amount (pennies) for the chance of a large gain (dollars).

• Defined AL as benefits of leverage without proportional risk.
• Sought opportunities where potential gain >> potential loss.

Ingredients of AL: Hite identified three key ingredients for achieving AL: Time (using time horizons to your advantage), Knowledge (using unique insights or data others miss), and Money (especially Other People's Money - OPM).

• Time: Waiting for the right moment, using long-term bonds.
• Knowledge: Using statistical analysis (like Billy Beane in Moneyball) or market structure insights.
• Money: Using borrowed capital or investor funds (OPM) to amplify returns.

The Guaranteed Fund. A prime example was the Mint Guaranteed Ltd. Fund, which put 60% of investor money in safe bonds (guaranteeing principal return) and 40% in the trading program (high upside). Investors risked only the time value of their money for a chance at significant gains, a powerful AL proposition.

7. Build a System: Remove Emotion, Rely on Data

My goal was to create a system I could put on autopilot so I didn't have to anguish myself over the ups and downs of the market.

Automate decisions. Hite's experience with his partner's emotional mistake led him to seek a trading system that removed human discretion entirely. He partnered with statisticians and programmers to build an automated, data-driven trend following model based on preset rules.

• Partner's emotional decision caused huge losses.
• Sought a system free from human fallibility.

Scientific rigor. The system was built on rigorous backtesting using historical data across many markets and time periods. This scientific approach provided statistical evidence that the strategy worked over the long run, even if individual trades were often wrong.

• Used backtesting on historical data (even 800 years).
• Proved the system's effectiveness statistically.

Stick to the rules. The key to a systematic approach is discipline. Even when the system is losing, you must stick to the rules you predetermined. Hite and his partners signed an agreement never to countermand the system, liberating them from day-to-day emotional pressure.

• Predetermined rules for entry and exit.
• Discipline to follow the system, especially during drawdowns.

8. Persistence Pays: Get Up and Keep Going

If there is one thing that made me successful in life, it has been this persistence.

Resiliency is key. Hite faced numerous setbacks: childhood disabilities, early career failures, near-bankruptcy from the corn trade, and losing millions due to his partner's error. Each time, he got back up, learned from the experience, and kept going. This resilience was crucial to his eventual success.

• Overcame childhood limitations and early failures.
• Recovered from significant financial losses.

Don't hide losses. When facing a crisis, Hite's approach was to immediately assess the damage, involve smart people (like his attorney Simon Levin), and communicate openly with those affected (like his investors). Hiding losses only makes things worse.

• Faced investors directly after the partner's mistake.
• Negotiated with creditors from a position of honesty.

Have a scheme. Instead of despairing, Hite immediately started planning his next move after major setbacks. After the partner's mistake, his "scheme" was to build a new, fully automated trading system, which led to the creation of Mint. Persistence is fueled by having a goal and a plan to achieve it.

9. You Have Choices: Make Smart Bets in Life

Regardless of your circumstances you have choice.

Choices define life. Hite believes that everyone, regardless of their background or limitations, has the power to make choices that shape their life. His own journey, from a disadvantaged child to a multimillionaire, is proof that dreams can overcome limitations through deliberate choices.

• Overcame severe disabilities through choices.
• Emphasizes personal agency over circumstances.

Make smart life bets. Apply the principles of smart betting to major life decisions:

• Know your goal: What do you truly want? Does this choice move you closer?
• Right place: Are you putting yourself in a position where opportunities exist?
• Doable: Are the odds of success reasonable given your abilities and resources?
• Worst-case: Can you afford the downside if it doesn't work out?
• Payoff: Is the potential reward worth the risk and effort?
• Adaptability: Are you willing to change course if it's not working?

Don't fear walking away. Just as in trading, don't be afraid to cut your losses in life – a bad job, a failing business, an unhealthy relationship. Staying too long in a losing situation prevents you from finding better opportunities. Walking away isn't quitting; it's making a smart bet on your future.

10. Let Your Winnings Run: Enjoy and Share Your Success

If you are good at something doesn't mean I should stop. You let your winnings run, and that's what I was doing.

Embrace success. Unlike some who are uncomfortable with success, Hite learned to accept and enjoy his winnings. He realized that if you've achieved wealth through integrity and smart decisions, you are entitled to let it grow and benefit from it.

• Overcame initial fear and discomfort with success.
• Realized that being good at something is a reason to continue, not stop.

Share your fortune. Hite believes in reciprocity and using wealth to help others. He established a foundation to strategically give back, focusing on areas where he could have the biggest impact, such as medical research, education, and helping persecuted scholars.

• Established a family foundation for strategic philanthropy.
• Focused on high-impact giving (e.g., medical research, saving scholars).

Continue innovating. Even after achieving significant wealth, Hite remains motivated by the creative challenge of finding new ways to make money, whether through refining trading systems or exploring new ventures like real estate. The process of identifying and leveraging opportunities remains a source of enjoyment.

• Continues to research and develop trading strategies.
• Applies his principles to new ventures like real estate.

Last updated: May 10, 2025