It Checks All the Boxes, Except the One that Matters
Your best ideas will become huge winners, complete disasters, and everything in between. It's your job to limit the disasters.
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At Mt. Carmel High School in San Diego, Billy Beane, the same Billy Beane portrayed in the movie Moneyball, was a three-sport standout. He excelled in football and basketball, but it was on the diamond where he truly dazzled. He batted .500 his senior year, with a rare combination of elite power, speed, and a cannon for an arm.
By graduation, Beane stood 6'4", 195 pounds, and looked like Mr. Baseball. To scouts, he was the prototype of an MLB Hall of Famer, and he became the most coveted high school player in the nation.
Stanford recruited him for both baseball and football. The New York Mets were so enamored with his potential that they selected him 23rd overall in the 1980 MLB Draft and handed him a $125,000 signing bonus.
Beane chose the pros over college, a decision that would later fuel his skepticism of traditional scouting. Because his skills and tools never translated. Over five seasons in the majors, he appeared in just 148 games and batted .219. He didn’t live up to the hype.
Beane's story isn't unusual in sports. It’s also a similar pattern we see in stock picking.
We stock pickers all invest differently, which means each one of our “perfect setups” is a bit different. But we all have checklists (literal or mental) we use when evaluating investments based on our past experiences. The hundreds or thousands of reps over 10+ years forms pattern recognition.
Microcaps are the emerging talent of the public markets, and we've all owned the ones that check every box. For me, “checking all the boxes” might look like a pedigreed repeat-winner CEO. A product that's easy to understand and clearly differentiated. A go-to-market strategy McKinsey would endorse. A brand-name institutional anchor on the cap table. On paper, it looks like a future superstar.
All that's left is execution. And it never comes. The production never showed up.
Stock picking will always be a probabilistic game. Nothing is 100% certain. The best stock pickers in the business run 60% hit rates across a portfolio.
Your best ideas will become huge winners, complete disasters, and everything in between. It's your job to limit the disasters.
Lee Freeman-Shor's insight in The Art of Execution is true. In a world where 50% hit rates are normal, stock picking success is determined by what you do after the initial buy decision.
When new information surfaces from your scuttlebutt, from earnings releases, from conversations with other investors, did you react correctly?
Did you buy more when the stock price fell below intrinsic value?
Did you sell when you could sense your thesis was breaking?
Did you hold when the business was performing but the stock price wasn't?
That's the whole game.
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