I don’t live in Silicon Valley. And I’m not technology expert.
But I do think it’s impressive how “venture capitalists” like Marc Andreessen and Peter Thiel have made billions by funding small tech startups. They are among the richest investors on the planet. After all, an early investor in a hit like Facebook or Uber can turn a $10,000 investment into $10 million
Making huge money in tech startups actually has a lot in common with making huge money in natural resources.
Probably the most important commonality is that master tech investors and master resource investors alike don’t place a focus on how often they are right. It’s simply not much of a concern for them.
This runs counter to how most amateur investors think. Amateurs place a ton of focus on “winning percentage.” They get entirely too worked up when they are wrong and lose money on an investment. They have a misplaced desire to be “right” as often as possible. And most find the idea of a 50% “win rate” to be completely unacceptable.
If you’re in this camp, I have news for you: You’re placing a lot of focus on something that doesn’t matter much.
Two simple stories can show you the power of this idea…
First, I’ll tell you the story of Babe Ruth…and how he became a legend.
Babe Ruth is considered one of the greatest baseball players of all time. He hit 714 home runs, a league record at the time. Over his career, he collected 2,873 base hits. He was a seven-time World Series champion. He made baseball’s “All Century” team.
However, Babe Ruth was also known as the “King of Strikeouts.”
Ruth led the league in strikeouts five times. He was the all-time leader in strikeouts when he retired.
In other words, Ruth succeeded a lot…but he also failed a lot.
Because of his aggressive style, Ruth would often either hit a home run or strike out. His home runs could win games instantly. The opposing team could spend hours gradually building up a lead…only to watch a Ruth home run destroy it in seconds.
In other words, when Ruth achieved success at the plate, the success was often very meaningful.
Ruth was okay with a few failures because he knew his successes would more than make up for them. This approach helped Ruth become one of the greatest baseball players in history.
To achieve success as a resource investor, you need to adopt the Babe Ruth mindset…
You must make your wins large and meaningful…and your losses small and insignificant.
Folks like Babe Ruth have used the “home run” mindset to achieve success for centuries.
Professional gamblers have used it to clean out casinos. Top traders have used it to generate 100%+ annual returns. And the venture capitalists I mentioned earlier have used it to make billions in startups.
Venture capitalists invest in dozens of different deals. The majority of them fail. Less than 20% turn out to be big winners. But venture capital winners are so massive that the venture capitalists’ overall returns are huge.
You see, top performers fail as often as anyone. But top performers ensure their failures are small and limited…while their successes are large and meaningful.
Why is the “home run” mindset important to your resource investment success?
Because it allows you to maximize your wins while minimizing your losses.
You’re not going to achieve success on 100% of your resource investments. That’s fine.
You probably won’t achieve success 75% of the time, and that’s fine too.
If you adopt a “home run” mindset, you can make huge profits even if you’re right the same amount as someone betting heads on a coin flip (50%).
That’s the story of Babe Ruth.
Here’s story number two…
Over the past 60 years, George Soros has made more than $20 billion by trading the financial markets.
Twenty billion is a huge number. If someone makes $2 million in the market, they are considered very successful. George has made more than 10,000 times that. (Whatever you think about Soros’ political views, there’s no denying the guy knows how to make money.)
Soros is a master of knowing how government actions will markets. He’s skilled at finding industries poised to boom.
But there’s a simple mindset that’s more responsible for Soros’ success than either of those things….
Soros once summed up the mindset like this:
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
Now…think back to Babe Ruth’s strategy. Babe didn’t focus on how often he succeeded.
He focused on making his successes large and meaningful…and making sure his mistakes were small and insignificant.
Like Ruth, Soros knows that his winning percentage is relatively insignificant.
It’s much, much more important to make a lot of money when you’re right… and lose a little money when you’re wrong.
When you make sure to win a lot when you’re right, and only lose a little when you are wrong, you can be right just half the time…and still make huge profits in the resource market.
The Power of the Big Home Run
To get an idea of how powerful this strategy can be, consider a hypothetical investment scenario…
On January 1st, you buy ten different stocks. You hold them for one year.
The return of these ten stocks after the one-year holding period months is listed below.
- 20%
- -80%
- -76%
- 32%
- -55%
- 235%
- 80%
- -99%
- -40%
- 383%
You bought ten different stocks. Five went up. Five went down.
That’s just a 50% success rate.
But because you hit a few big winners (#6, 235% and #10, 383%), you made an excellent average return of 40%.
And you made this excellent return while being right just 50% of the time.
This is the power of making your winners large and meaningful while keeping your losers small and insignificant.
Don’t get me wrong. I like to be right as much as anyone. I try to cut my downside as much as possible on my investments. But the simple fact is that resource investments carry risk. I know I’m not going to be right 100% of the time.
Resource investments frequently produce triple- and quadruple-digit returns. Participating in these massive winners is a major component of our success. Focusing on winning percentage is not.
Regards,
Marin Katusa
