Graham Weaver is a private equity investor and this is a summary of his lecture to the Stanford Graduate School Business. He begins by talking about how investing is all about finding asymmetric opportunities.
“When I started my investing career, I focused almost exclusively on what I believed were the two fundamental rules of investing: Rule One: Don’t lose money, and Rule Two: Never forget Rule One.
We bought some companies at very low prices and others at a discount to their net asset values. On three separate occasions, the memo I wrote to our investment committee claimed, “It is mathematically impossible to lose money on this investment.” We lost money all three times. In fact, I personally lost money on five of my first eight investments, and we lost money on our first fund.
Over my 29-year career as a professional investor, I have come to realize that in those early days, I was dead wrong in my thinking about investing. If I had to summarize great investing in a single word, it would be “asymmetry.”
I learned that, yes, it is possible to reduce one’s downside, but it is not possible to eliminate it. The better strategy is to seek opportunities where the possibility of gains wildly outweighs what you can lose, which is typically capped at 1x your investment.
Further, there are criteria, which, when you stack them on top of each other, don’t stack linearly; they become logarithmic — or asymmetric. For example, if you have an incredible management team who builds a great team to support them, moves at a fast pace, operates in a large industry, can redeploy large amounts of capital at high returns, and is willing to do so over a long time – then you’re not playing for a 1.5x or 2.0x outcome, you could be playing for a 10x, 20x, or even 100x outcome.
Investing is about finding those asymmetric opportunities.”
The rest of the lecture is about how to extend this to living an asymmetric life. He talks about four principles in detail:
Principle 1: Do Hard Things: “When you can get comfortable being uncomfortable, you can have nearly anything you want in this life”
Principle 2: Do Your Thing: “When faced with choices about what we want to do, most of us miss one important piece of the equation. We factor in all the risks and tradeoffs, but we completely discount how differently we will show up when we’re truly energized about something.”
Princple 3: Do it for decades: “The equation for returns is X = (1+R)^N, where N is quadratic. Consider this equation where X represents your competence in any given role. The R represents everything you’re doing to improve yourself: coaching, reading, learning, writing out your goals, using your imagination, etc. The most powerful part of the equation is the N, the number of years you are in your role. If you love what you do, you will do it for a long time, and your N will be large. And if you improve at a reasonable rate over a long period, you can become the best in the world at what you do. There is almost no obstacle that won’t yield to you at full power for a decade.”
Principle 4: Write Your story: “No matter where you are in your life right now, you can write a new story.”
He ends the speech with what holds us back from doing these – Fear. It is worth listening to Graham’s speech with his anecdotes underpinning those principles.
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