One way to have good returns when investing is to have a few winners and merely avoid losers. Of course, you must have some winners and a plausible way to avoid the losers which is easier said than done. In the world of investing, the winners take care of themselves because they will have an outsized gain compared to everything else.
Another way to invest is to have more winners at the risk of more losers (e.g. the venture capital model). You need to be able to identify the winners before others do. You need to have more winners to offset the risk of more losers.
This a neat way Howard Marks explains risk and why the extremes don’t work. You can’t have only winners. You can’t avoid all losers.
- Startup investing is investing in options
- Is risk another form of compounding?
- Lowering interest rates increased the need to find more winners
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Bill Gurley, GP of Benchmark Capital said, “The best ways to protect against the downside is to enjoy every minute of the upside.” Markets have cycles and it’s difficult to time the market. One way to protect against downside risk is to take full advantage of the upside. That way, your returns cushion the inevitable downturn.