A friend just got back from Las Vegas and offered this report:

“As I got off the freeway at Tropicana Blvd., I counted 22 cranes against the skyline. I thought the economy must not be so bad, but later a cab driver told me that many of those cranes are idle – the half-built towers are on hold. Later, I heard on a local news station that gaming revenues were down 20% compared to this time last year.

“Yet when my friend and I walked from the Mirage to the MGM Grand on Friday night, the sidewalks were teeming with young, energetic drunks and bleary-eyed women stumbling through the crowd atop thousand-dollar stiletto heels. Again, I wondered how bad the economy could be. But when we entered the MGM Grand, I saw something that seemed odd to me. The card tables with minimum bets of $25, $100, and $500 were full to overflowing, but the rows and rows of slot machines were mostly empty. The middle class was not in Las Vegas this weekend, but there was plenty of money changing hands.

“Slot machines are known as sucker bets, but every bet in Las Vegas is in reality a sucker bet, because the odds always favor the house. Last Friday, they were simply fleecing a higher class of sucker. This was two days before the bankruptcy of Lehman Brothers and the emergency sale of Merrill Lynch, but I felt like I was looking at a microcosm of the U.S. economy – fewer and fewer people making bigger and bigger bets…”

Watching the stock market this week, I know how he feels. Financial services companies that made billions between 1999 (when the Glass Steagall Act was repealed, allowing banks to get back into the investing business) and 2007 are failing today because they chose the bad profits of risky, complicated wagers over the good profits of traditional banking. Good profits are earned in exchange for real value provided; they grow from long-term relationships. Bad profits come from making bigger and bigger bets with less and less margin of safety. One can occasionally hit the jackpot, but over time the odds against you keep growing.

I often tell investors to look for a margin of safety; that if you take care of the downside, the upside will take care of itself. This applies not only to investing, but also to the day-to-day operation of your business. For example, when you take time and effort to provide exceptional customer service, that effort contributes to your margin of safety and long-term profitability. Good profits lead to more profits. Bad profits are one-time deals that limit future opportunities.

Singer-songwriter David Bromberg put it succinctly: “A man should never gamble more than he can stand to lose.” The big investment banks forgot about margin of safety. Let’s hope they don’t make suckers of all of us.