Q&A: Which is Riskier--Playing to Win, or Not to Lose?
As the r/CountryDumb community nears 7,000 members around the globe, it is clear that curiosity is driving engagement, and that I could do a better job of explaining how my portfolio is structured.
It’s very simple. It’s not hard, or complicated. But the people who see my performance chart, which clearly shows a moonshot from $97k to more than $3M in less than three years, are either genuinely interested in the secret, or automatically assume I’m gambling.
This is because most people haven’t truly studied the mindset of successful entrepreneurs and the creative industriousness that sets them apart from the crowd. It should be obvious, but there is indeed a huge difference between “dreams” and “wishes.” And if you don’t believe me, take it from Dolly Parton.
Helluva talk if you haven’t seen it. Click here to watch the YouTube video.
And though most people on this Earth would like to have more, few are willing to develop and deploy a realistic strategy to achieve their dreams. And instead of structuring their days, hours, and minutes in the attainment of that goal, most get up every morning and do the same thing, day in and day out, which always involves “wishing” for a different outcome...but doing nothing to foster that same wish into existence.
This way of thinking is toxic, because it paralyzes people with a fear of failure, and prevents them from welcoming the very tool that true entrepreneurs know is the secret sauce to success—failure! Yes, failure. Because is you are smart about losing, it means two things:
- You’re constantly learning how to better yourself.
- You’re putting yourself in a realistic position to succeed.
There’s no better illustration for this than the stock market, because to the entrepreneur, the whole game is a combination of psychology, business, risk-management, and stellar competition with a standard scorecard for wins and loses.
If you see red, that’s a loss. Green is good.
But this very scorecard is what terrifies the average investor, and causes them to play the game to prevent loss, rather than implementing a methodical risk-management strategy to encourage wins.
Playing “Not to Lose”
Yesterday, while making a pot a coffee at work, some goofus came on the TV talking about planning for retirement, and I laughed the whole time, because it was the same trite bullshit Wall Street’s elite are always peddling. The 10-minute infomercial encouraged diversification and even admitted, “Every four years the market will lose 20%, but if you’re diversified and stick to the plan, you will achieve a consistent rate of return of 12% over the long run.”
Really?
Because I remember all them old heads at work losing 50% of their portfolio in 2009 with Fidelity’s recommended 60/40 diversified strategy, then having to work an extra decade just to get back to their 2007 balance.
And why?
Because the diversified portfolio is intentionally designed to weather 20-25% corrections, but not 50% Black Swan events. So the very tool that is supposed to prevent loss, actually creates a devastating susceptibility to substantial risk during a bear market.
I should know, because when COVID happened, I lost half of my portfolio just like the plant guys did back in 2009. And that’s the day I started to manage my own portfolio, and decided to “play to win” instead of “not to lose.”
But how?
First, let’s take a look at the traditional diversified portfolio, which generally averages about 12% annual returns. But in my case, I got laid off, so I couldn’t make any further contributions or bank the employer match. So, by sticking to the diversified portfolio, excluding any bear market or 20% correction, I could expect to grow a $100,000 retirement balance to a respectable $357,000 over the next 10 years.
This would have worked fine for most, but I had a “wish” to retire early and a mental-health “necessity” to reduce my stress and get better sleep. The only problem was, I didn’t yet have a realistic “dream,” which would require a tangible plan to grow my portfolio to $10 million without taking on substantial risks that could prevent me from retiring at the tradition age of 65, should things go wrong.
What I did have, was a numbers problem.
Because I knew in order to grow $100k into $10 million, I had to take on more risk, but how? And I knew the only safe way to do this effectively would be to take a lesson I learned from a Mayfield Milk Man, and dedicate a small portion of my portfolio—say 10%—to one high-risk/high-reward trade per year.
But if you look at this strategy through the lens of a traditional diversified portfolio, if none of those 10 trades work over the course of ten years, my ending balance would tally a terrifying $109,000 instead of the expected minimum of $357,000, had I stayed the coarse and took no additional risk throughout my life.
In short, there’s no smart way to “play to win,” if you’re depending on a Fidelity Freedom Fund to help you “not to lose.”
Playing to Win
The goal of any business should be to generate cash through growth. Businesses that try to preserve cash turn into zombie companies and are the exact kinds of stocks most investors try to avoid because they have no earnings. That’s why I chose to set up my portfolio like an actual growth company, which throws off huge amounts of cash each year—a portion of which can then be safely allocated to high-risk/high-reward speculation.
This is the most basic principle I used while at the poker table:
- Never bet big unless you have first generated the extra cash to safely play out the hand.
The purpose of this is to keep any one hand from wiping you out of the game.
And if I didn’t win for a while, I NEVER bet big until I had first built up the cash reserves again and could afford to safely take on more risk. The worse thing anyone can do in the event of a loss, is to try to double-down with a riskier bet.
Defining the Strategy
Warren Buffett once said he were starting out from scratch, he could easily make a consistent 50% annual return with very small amounts of money. And I’ve found this to be true in my own case, because micro-cap and small-cap companies, are the easiest way to make fast money.
On the other hand, if you’re dealing with a $30 million portfolio, it would be nearly impossible to make a 50% return playing this game because most of the real opportunities will come with volume restrictions that would prevent a mega-millionaire from allocating 10% of his/her portfolio to a particular stock.
But for the average investor with $100,000, it’s really easy to spread that same $100k across 10 stocks for $10k each. And if you pick a basket of 10 stocks with 10-bagger potential there's a huge margin of safety built into the math. For example:
- If five of those stocks go broke….
- One stock makes a 300% gain….
- Two tread water….
- And the remaining two only do 500% gains….
Get this!
Your overall portfolio will still grow to $130,000, which is a 30% rate of return for one of the shittiest winning percentages I could dream. But when you set up a portfolio like a true business, which is designed to generate huge amounts of cash, then the savvy stock picker has the ability to safely take a few shots down field in the coarse of his/her lifetime.
And the best part....
Even if you’re a complete stock-picking moron and none of your 10 high-risk/high-reward trades pay out, the ending balance in your portfolio will still look a helluva lot better than the diversified investor who played his whole life “Not to Lose!”
Hope this helps.
-Tweedle
Posted Dec 23, 2024, 4:20 PM UTC