What You Put In, What You Lost
In the early seventies Michele Sindona was reckoned the most powerful financier in Italy. He controlled one of the biggest banks in the United States, managed the Vatican’s investments abroad, funded the Christian Democrats generously and, it was suspected, laundered money for Cosa Nostra. In 1974 his empire collapsed under charges of fraud, and Sindona fled to America.
What came next, as Dickie tells it, was an attempt to rescue what was already lost. In 1979 he hired a mafioso to kill the lawyer who was liquidating his Italian assets. When the authorities on both sides of the ocean wanted to ask him some questions, he staged his own kidnapping with the help of mafiosi from the heroin pipeline. The kidnappers were supposed to be the “Proletarian Committee of Subversion for a Better Justice”; no such organisation, needless to say, ever existed. Sindona spent about three months in Sicily “with the terrorists” and even let them shoot him in the thigh, under anaesthetic, so that he could show proof of torture later. The real aim was to send threatening letters to his former political allies, so that they would take fright and find a way to save Sindona’s banks, and Cosa Nostra’s money along with them.
The trick didn’t work. Sindona was “released”, gave himself up to the FBI, and in 1986 died in prison after drinking a coffee laced with cyanide.
Look at this man’s account. To save his banks he put in the depositors’ money, the Vatican’s trust, the friendship of politicians, a lawyer’s life, three months in Sicily and his own leg. The return: zero. Everything put in before 1974 was already lost. Everything he put in afterwards went not into the future but into the past.
What You Got Back on What You Put In
Let’s start with some calm arithmetic. The return on an investment is how much you got back for every dollar you put in. Put in a hundred, get back a hundred and twenty, and your return is twenty per cent. Put in a hundred, get back ninety, and you’ve paid ten for the pleasure.
A simple formula, and it fools everybody. It fools them because under “put in” people count only the money, and under “got back” only the best case. Let’s count one operation honestly.
Pistone describes the “Las Vegas Night” that the FBI agents put on with Sonny Black at their club in Florida. Sonny put up ten thousand dollars for the bank. He took a thousand dollars to Santo Trafficante in a greeting card meant for a friend, and Trafficante, according to Sonny, appreciated the card. The takings were to be split three ways: New York, Trafficante and the crew of croupiers from Miami. A captain in the sheriff’s office got his cut and sent the patrol cars to the far end of the county. Six croupiers, a barman, girls, a man on the door. By midnight there were about a hundred players in the room, and the organisers were a few thousand ahead.
At a quarter past one in the morning, two men from the sheriff’s office turned up at the door. One of them dropped a quarter into an old slot machine that didn’t work and was only there for the atmosphere, got his quarter back, and announced that this was gambling. The guests had to be led out through the back door, and the organisers were taken away to have their identities checked. Sonny, as he left for Brooklyn, told Tony that he would be well advised to get the ten grand back fast.
Now work out the return the way it should have been worked out beforehand. Not “a few thousand ahead by midnight” on ten thousand put in. But a third of the takings, minus the card, minus the bribe, minus the croupiers, multiplied by the chance that the night would end normally, against the chance of losing the lot, along with your reputation in front of “the old man”. A return that ignores risk isn’t a return. It’s a daydream with a calculator. Count not the best outcome but the average one, with all the costs and all the ways the thing can end badly.
The Best Investment in the World
Sometimes the return is enormous, and then it’s worth taking a closer look at why.
Dickie tells how, in Palermo in the early sixties, at the height of the building fever, when Salvo Lima and Vito Ciancimino were running the public works department, the city council issued 4,205 building permits. Eighty per cent of those permits went to five people. They were no construction tycoons. Their qualifications were confirmed under a rule from 1889, by which a building firm had to have a “master mason” on its books. One of the five turned out to be a coal merchant. Another had once been a mason, but had then taken a job as doorman and caretaker in one of the buildings whose construction he had supposedly directed. Under questioning he explained that he had simply signed the licences as a favour to friends, so as not to make life difficult for himself.
Work out the return on an “investment” in a modest post at the public works department. A chair in an office, a desk, a stamp. And through them passed a huge share of the city’s money. Dickie draws a conclusion from this that anyone who works with rules ought to know: the stricter the rule, the higher the price you can ask for a way round it.
The moral for the office is simple. If the return on some investment looks incredible, find out who is paying for it. Sometimes you’ve made a real find. More often you’ve found someone else’s pocket, and sooner or later its owner will notice.
Money That’s Already Gone
Now for the most expensive mistake in money matters. Sunk costs are the money, time and effort you have already spent and won’t get back, whatever you decide next. A sound decision about the future leaves them out entirely. It doesn’t matter how much you’ve already put in. All that matters is what the next dollar will bring.
It sounds simple, and everyone lives otherwise. Gambetta gives, in a footnote, the case of a creditor who was owed one billion two hundred million lire. The creditor was persuaded to buy land from the debtor for one billion four hundred million, in other words to pay another two hundred million on top of the debt. The land was worth about half that price. Why did he agree? He was “persuaded”, of course, and we can guess how. But look at the logic he was caught in: to get back what you’ve already lost, put in more. The more a man has already lost, the easier it is to talk him into losing more.
Remember the Morello cooperative? In the autumn of 1908, when the money ran out, Morello came to the shareholders with the same request: there will be no dividends, let’s put in more to save what we’ve already put in. The shareholders refused, and I have to admit that was sensible, although the way they expressed their disagreement is not one I’d recommend to you.
How Not to Get Trapped
There is one question that gets you out of almost every sunk-cost trap. If I were starting from scratch today, knowing everything I know now, would I put money into this? If the answer is no, then everything you’ve already put in is no reason to put in more. It’s a reason to stop.
Don Vincenzo closed his nephew’s trattoria after a year, though he had put a good deal into it and loved the boy. The nephew begged for another six months: “Uncle, we’ve put so much in already, it’d be a shame to give up.” The Don answered that what he had put in was already lost, while six months meant new money, and asked what the nephew wanted it for now. The nephew said: “So the old money isn’t wasted.” The Don said: the old money is already gone, but the new money I can still save. That was the only time I saw the Don refuse a relative money. And one of the few times he had no regrets afterwards.
The Bottom Line
Count the return on the average outcome, not the best one, and if it looks incredible, find out who is paying for it.
Sindona never asked himself the clean-slate question. He kept putting into the past until he put his leg into it. It will cost you less if you learn to say, in time: “That isn’t our money any more.”