In stock investing, success isn’t about being right all the time—it’s about how much you gain when you are right and how little you lose when you are wrong.
Asymmetric bets are opportunities where the potential upside far outweighs the downside risk.
(Source: @thedoorman_)
Even the best investors, with years of experience and rigorous analysis, often have a “batting average” of only around 50%. Some even succeed less frequently, hitting the mark only 45% or 40% of the time, yet they achieve phenomenal results.
This seems counterintuitive, doesn’t it?
This performance is possible because their few correct decisions yield outsized gains that overshadow the impact of their mistakes.
The first principle in identifying these asymmetric opportunities is focusing on the downside risk. Great investors are risk-averse and seek to limit losses—a stock’s downside must be minimal, ensuring any potential misstep doesn’t derail their portfolio.
Once this safety is established, they shift their focus to the upside. The ideal investment is one where the downside is limited, but the upside is significant.
“Heads I win, tails I don’t lose much“ Mohnish Pabrai in The Dhando Investor
For example, consider an equally weighted portfolio of 10 stocks. Over a decade, if nine stocks deliver flat returns while one stock grows 20x, the portfolio’s compounded annual return will be 11.2%, beating the market’s long-term track record.
If the winner increases by a factor of 30x, the compounded return will even be an incredible 14.6%.
Let’s say you make the winning stock not a 10% position, but a 15% position, sizing it a little bigger than the remaining positions, the CAGR jumps to over 18%!
As the examples highlight, a single winner can compensate for the lackluster performance of the rest (if sized accordingly), showcasing the power of magnitude over frequency.
The Psychological Challenge of Embracing Asymmetry
Embracing asymmetric bets requires a shift in mindset, one that counters human evolutionary instincts. As risk-averse creatures, shaped by millennia of survival-driven adaptation, we are wired to seek frequent wins and avoid losses at all costs.
This leads to behaviors rooted in loss aversion that comes in different shapes and forms, as outlined by many behavioral researchers.
We prefer being right more often than being wrong, even when this mindset is harmful in probabilistic fields like stock investing.
In practice, this means many investors struggle to focus on identifying and holding onto big winners. Many professional investors reflect in their year-end letter on these types of mistakes (selling winners early) and identify them as the mostly costly ones.
Psychologically, it’s far easier to sell a winning stock after it doubles than to hold it for the long term, allowing it to grow 30x or more.
“Nobody ever went broke taking a profit.” (underperforming investors)
The frequently expressed mantra expressed above, might be the worst investing advice you can encounter.
Thus, emotional discipline and probabilistic thinking (what’s the upside/downside? and what are the odds of each?) are critical for overcoming this challenge. Successful investing doesn’t demand perfection or 100% accuraxy—it requires patience, conviction, and the ability to let magnitude, not frequency, drive results.
By seeking asymmetric bets, investors can turn the rare big wins into meaningful contributions to their portfolio’s overall success, even if most other bets fail to deliver.