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- One Way Bungee Jumps
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If you’re new here, I share “buy-and-hold portfolios” that can double in 3-5 years. The investment philosophy is simple: Try to find the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
Here is the performance of our current active portfolios:
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Today, I’m going to write about the mathematical reality that will transform how you think about losses and gains.
If you're like most investors, you've probably had those sleepless nights. The ones where your carefully chosen stocks have been bleeding red, and you’ve wondered whether you've made a terrible mistake.
Maybe it was during the most recent crypto pullback, when Bitcoin fell 30% from its highs. Or perhaps it was that sinking feeling in 2020 when covid rocked markets causing the S&P500 to drop over 40% in a month.
I get it. Our ETHE bet in Coffee Can 12 was down 65% at one point. Our AMD bet in Coffee Can 14 was down almost 40% at one point. These drawdowns test everything we think we know about investing. They make us question our research, our conviction, and frankly, our sanity.
But what if I told you that these painful unrealized losses, the very ones keeping you up at night, are actually the foundation for experiencing multi-baggers?
We're All Afraid of One Way Bungee Jumps
I heard the phrase "one way bungee jumps" from Carl Kawaja on the Invest Like The Best podcast a few years ago. It immediately resonated with me as the perfect description of our deepest investing fear: the fear of total loss.
Think about the nightmare scenario of a one way bungee jump, you leap off the platform and there's no cord. In investing, this translates to that gut-wrenching fear that your stock goes to zero.
This fear of permanent total loss is what makes us sell at the worst possible moments. It's what prevents us from taking the calculated risks needed for extreme positive outcomes.
But here's what the math tells us:
When you're positioned correctly with proper sizing, even a few actual one way bungee jumps can't destroy your ability to capture massive winners.
Remember, the most you can lose on a stock is 100% (and oh by the way, that is highly unlikely), but you can make multiples from a winning stock.
How Position Sizing Protects You
When hunting for multi-baggers, you can protect yourself with mathematical diversification:
If you put say 5% of your portfolio into 20 different stocks, even if several go to zero, you can still survive and thrive
Your maximum loss on any single bet is limited to that 5%
Your maximum gain on the other hand is theoretically unlimited
A single multi-bagger can offset multiple complete disasters and still leave you with exceptional returns
This isn't theory, it's mathematical fact.
In our Playing For Doubles Coffee Can Portfolios, we've experienced this asymmetric reality firsthand:
As much as I hate to admit it, Coffee Cans 9 and 11 were complete disasters. I mean, just look at how horrific those drawdowns were: 73%, 90%, 85%, 88%, 83%!
But both portfolios, despite being very aggressively concentrated, ended down only ~35% on average, over 3 years.
In the grand scheme of things, our winning portfolios, which averaged +145%, more than compensated for those 2 complete disasters.
Why This Changes Everything About Risk
Traditional investing wisdom tells you to minimize risk.
Multi-bagger investing tells you to optimize risk.
There's a huge difference.
When you minimize risk:
You're trying to avoid losses or even worse avoid volatility. You diversify across safe, predictable companies. You sell when things get scary. And you never let any position get "too big."
When you optimize risk for extreme outcomes:
You're building a portfolio that can survive multiple one way bungee jumps while still capturing unlimited upside when you're right.
This is why position sizing matters so much in our Coffee Can approach.
We're not trying to avoid one way bungee jumps entirely, that's impossible when you're seeking extreme outcomes.
We're trying to ensure that even if we experience a few, they can't prevent us from capturing the massive winners that make it all worthwhile.
This is the Venture Capital Way.
The Emotional Reality Check You Need
I know what you're thinking: "This is easy to say when you're looking at historical data, but what about when I'm watching my money disappear in real-time?"
That's the most human response possible.
And it's exactly why most investors underperform the market.
Our brains are wired to feel the pain of losses more acutely than the pleasure of gains.
Behavioral economists call this "loss aversion," and it's the enemy of multi-bagger investing.
Your emotional response to the fear of one way bungee jumps
is often inversely correlated with your long-term success.
When our stocks plummet, the natural response is panic and asking questions like did we miss something critical in our analysis? or should we sell before we lose everything?
But the track records of successful multi-baggers (which are usually multi-year journeys), show us that these moments of maximum fear are often followed by maximum opportunity.
If we can remember our position sizing protects us from any single one way bungee jump, we can stay the course.
2 Mental Models That Make This Easier
1. The Venture Capital Mindset
Venture capitalists expect 7 out of 10 investments to fail. They're not disappointed by failures, they're expecting them.
The entire business model is built around extreme outcome investing: 1-2 massive winners will more than compensate for the failures.
We should think about our stock portfolios the same way.
Not every pick will work. In fact, most won't be home runs. But the few that do work have the potential to be extreme outcomes that define our entire portfolio's performance.
2. The Baseball Analogy
A .300 hitter in baseball is considered excellent. That means they fail 70% of the time and are still among the best in the game.
The best multi-bagger investors often "fail" 40-50% of the time with significant losses, yet still generate exceptional long-term returns.
That's Hall of Fame-level performance in any domain: Take for example Roger Federer, arguable the best tennis player ever, he lost a whopping 46% of the points he played, but won 80% of his matches!
What This Means for You
The next time you're staring at a significant loss in your portfolio, remember this multi-bagger math. Ask yourself:
Is this a business problem or a stock price problem? Sometimes great businesses have terrible stock performance for extended periods.
What's the maximum this position can cost me? If it's 3-5% of your portfolio, the math says you can probably afford to let it ride.
What's the potential upside if the business thesis plays out? If it's 3x, 5x, 10x, the extreme outcome math might still be heavily in your favor.
Am I selling because of new information about the business, or because of price movement? Price movement alone is rarely a good reason to sell a quality business positioned for extreme outcomes.
In Conclusion: The Uncomfortable Truth About Multi-baggers
The path to exceptional returns requires embracing the possibility of extreme outcomes, both positive and negative.
Every investor who has achieved market-beating returns over the long term has a closet full of mistakes. The difference between them and everyone else isn't that they avoid losses, it's that they position themselves to capture extreme positive outcomes when they're right. Investing really is a Home-run Hitters Game.
The investors who can emotionally handle the inevitable "one way bungee jumps" while maintaining conviction in their best ideas are the ones who capture the unlimited upside that makes all the pain worthwhile.
What's Next?
If this investing philosophy resonates with you, but you're not sure how to apply it to your own portfolio, I'd love to help.
I'm offering free 30-minute portfolio reviews if you want to discuss position sizing, emotional discipline, and the math of extreme outcomes. We can talk through how these principles apply to your specific situation.
Remember: the goal isn't to avoid losses. The goal is to position yourself for extreme outcomes so that when you're right, you're really right.
And that math can be life-changing.
If you enjoyed this article, please share it with a friend, they may like it too!