Bruce,
That is an excellent illustration of why the LT is such an important piece of LTB&H. It is clear that a goal of 20% per year is certainly sufficient for the creation of wealth in the long term.
What Jason is discussing is his particular method of achieving that goal of 20% annual growth. His preferred method is to choose several companies with the potential to increase dramatically each year, in the hopes that one or two actually will. Lindy mentions that, "the ones you take a bath on can kill the big gainers." I'd like to explore that a bit with a goal of 20% in mind.
Let's suppose you start with $10,000 and invest it evenly among 10 shiny pebbles with the potential to be very big gainers. Let's also assume that 9 of those 10 perform very poorly.
Scenario 1: Those 9 out of 10, on average, lose 90% of their value. (It happens. Trust me.)
Initial Return Final Value
ONE $1,000 1010% $11,100
NINE $9,000 -90% $900
--------------------------------------------
Overall $10,000 20% $12,000
You see that the one big gainer must be an 11-bagger in order to achieve your goal. However, this scenario of 9 stocks losing 90% of their value is rare. More realistic is...
Scenario 2: Those 9 out of 10, on average, lose 50% of their value.
Initial Return Final Value
ONE $1,000 650% $7,500
NINE $9,000 -50% $4,500
--------------------------------------------
Overall $10,000 20% $12,000
Here, the one big gainer must be about an 8-bagger in order to achieve your goal. Let's try another...
Scenario 3: Those 9 out of 10, on average, remain flat, neither gaining nor losing value.
Initial Return Final Value
ONE $1,000 200% $3,000
NINE $9,000 0% $9,000
--------------------------------------------
Overall $10,000 20% $12,000
Now the one big gainer need be "only" a 3-bagger in order to achieve your goal of 20% growth.
The point is this: If you distribute your funds evenly among a large enough number of (carefully chosen) companies at the outset of such an experiment, it is not unreasonable to expect a good overall return.
Whether one chooses to invest in ten companies which are likely to appreciate by 20% each over a year or in ten companies, nine of which are likely to fail as investments and one of which is likely to succeed dramatically is a matter of personal preference. Both are equally valid strategies. Regardless, however, it is clear that we all believe that choosing these companies using gorilla game methodology dramatically increases your chance for success. That's why we're here.
M |
