The last installment in Chenmark‘s Managing Uncertainty series featured a quote that we really liked:
“I’ve said many times on this blog that our target batting average is ‘1/3, 1/3, 1/3’ which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments.”
The entire piece is about evaluating different assets for investment, but we like this particular paragraph because it gets to an idea al the heart of successful collecting as well (almost all of Chenmark’s articles do, at the end of the day).
The article goes on to explain how Chenmark actually targets returns that are better than profiting from 1/3 of their investments, and being comfortable with 1/3 of their bets going to zero – most of us probably feel the same way about our collectors’ items. But the point here isn’t the exact percentages. The point is that there are defined percentages.
The 1/3 idea can serve as a framework – maybe most of us aren’t comfortable with the idea of putting down money for something that might actually be worthless (go to zero), but figuring out just how much we are willing to “lose” (as Chenmark outlines for themselves in the article) is worth doing. If we get in the collecting pool, we are going to lose at some point. Whether we accidentally purchase something worthless or just overpay for something, we are going to lose. And it’s very likely, that sometimes, we are going to win. Big.
Which is great. Everyone likes to win big. But bigger wins generally involve more risk. So it’s ideal to think thoroughly exactly how much can be risked. If you start by knowing how much you’re comfortable losing, you’ll have a better idea how much you’re likely to win, and that can make a huge difference in the collecting game.
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