Asymmetric Risk
QUOTE
Mohnish Pabrai once said…
“Heads, I win. Tails, I don't lose much.”
(American businessman and investor)
CONCEPT
Asymmetric Risk
Asymmetric Risk describes a bet where the potential downside and potential upside are wildly unequal.
The best asymmetric bets look like this: if you're wrong, you lose a small, defined amount. If you're right, you gain something far larger—sometimes without any real ceiling at all.
STORY
Big Bet … Small Loss?
In 1939, a 26-year-old stockbroker named John Templeton borrowed $10,000—a significant sum during the tail end of the Great Depression—and made a decision that struck almost everyone around him as reckless.
As war broke out in Europe, panic gripped American markets. Investors were dumping shares of any company connected to uncertainty, and stock prices on the New York Stock Exchange had collapsed to levels that reflected pure fear rather than actual business value.
Templeton looked at the wreckage and saw what everyone had missed: extreme undervaluing.
He instructed his broker to buy 100 shares in every single company trading on the NYSE at $1 per share or less. No exceptions, no individual analysis of each business. The order captured 104 companies, 34 of which were already in bankruptcy proceedings.
At $1 or less per share, Templeton's maximum possible loss on any individual position was capped—he could lose 100% of a tiny stake, but no more. Meanwhile, if a distressed company survived and merely returned to modest health, the percentage gain could be enormous, since the stock had nowhere to go but up from near zero.
He wasn't betting that every company would recover. He was betting that enough of them would, and that the wins would swamp the losses.
Templeton held the portfolio for roughly four years as American industry mobilized for war and the economy clawed back from the Depression. When he finally sold, the results were extraordinary: of the 104 companies, only four turned out to be completely worthless. The other 100 had recovered, many dramatically. His $10,000 investment had grown roughly fourfold, into approximately $40,000.
Templeton later said his only regret was selling too early—several of the stocks continued climbing well after he exited.