Heads I win, tails I don't lose much

Dear friends,

I hope this finds you in good health and high spirits, primed for yet another serving of insights and wisdom in the realm of finance and investing.

Today, I am thrilled to discuss a captivating principle that has recently caught my attention. This principle transcends boundaries; it's equally applicable to business, personal finance, investing, and more. It is succinctly captured by the phrase, "Heads I win, tails I don't lose much." I gleaned this from the enlightening book "Dhandho Investor" penned by Mohnish Pabrai.

In essence, as value investors, our quest should be to uncover opportunities that present minimal risks but offer unlimited potential for gains. It might seem like a simple precept, but when intertwined with the magic of compound interest, a topic we delved into in a previous letter (here's the link if you missed it), it's a game-changer. It can potentially pave the path to amassing a fortune.

Let's delve into a few illustrative examples:

Business: Amazon provides a stellar example of this concept. Over an extended period, the company concentrated its efforts on a single, seemingly simplistic idea - selling books. Over time, they began casting a wider net, experimenting with an array of ideas. Some of these initiatives fell short, but the successful ones, like AWS, proved to be goldmines. These experimental ventures were relatively cost-effective compared to the company's overall revenues, but their success could yield exponential returns, driving more opportunities, revenue, and propelling the company far ahead of its competition.

Personal Finance: The beauty of this principle is that it extends beyond the realm of business and investing and into personal finance. Learning new skills, for instance, is an area where this principle shines brightly. Imagine investing $1,000 in a coding course. The upfront cost may seem significant, but the potential return on investment can be monumental. In the burgeoning digital age, coding skills are in high demand, opening the door to numerous lucrative opportunities.

Moreover, consider the principle of "Heads I win, tails I don't lose much" in the context of diversifying your income sources. The pursuit of a side hustle, for instance, could serve as an excellent example. Whether it's freelance writing, tutoring, or launching your own e-commerce store, these ventures require an investment of time and often a bit of capital. However, the risk associated with them is often limited, yet the upside potential is significant. Even if your side hustle doesn't transform into a full-time gig, the financial and experiential gain can be substantial, providing you with valuable skills and an additional revenue stream.

Investing: As someone who runs a '10 by 10' portfolio, like me (I allocate no more than 10% of my portfolio to a single stock, hence limiting my portfolio to a maximum of 10 stocks), you have the luxury to place a wager on a company and if it soars, your wealth will follow suit. Moreover, investing in a company with a low market cap but a high liquidation value can put you in a similar advantageous position. An apt example is Mohnish Pabrai's investment in the Turkish company Reysas. He purchased it when its market cap was a mere $30 million, while its liquidation value was over $500 million.

In my journey, I've had my fair share of missteps when I didn't heed this rule. I once placed all my eggs in one basket, betting on a single idea which I believed had immense potential. Unfortunately, Lady Luck didn't favor me, and I ended up playing a "win something - lose everything" game instead of a "limited risk, unlimited returns" one. This experience, though bitter, was an invaluable lesson.

In the spirit of transparency and continuous learning, I hope sharing this principle and my experiences will help you reevaluate some of your decisions and potentially change your life for the better.

Let's remember what Warren Buffet and Charlie Munger, two of the greatest value investors, always emphasize: "The first rule of investing is don't lose money; the second rule is not to forget the first." When we bear this in mind and couple it with the principle of "Heads I win, tails I don't lose much," we equip ourselves with a potent strategy to navigate the unpredictable seas of investing.

Looking forward to our continued journey towards financial wisdom together.