On Playing to Win (The Asymmetry of Opportunity)

Tyler Gardner (0:00)

Hello, friends, this is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. In early 2006, Robert Iger, CEO and executive chairman of the Walt Disney Company, sat across from Steve Jobs in a quiet conference room at Apple's boardroom in Cupertino, California, staring at a lopsided list on a 25-foot long whiteboard. They had just spent hours mapping out the potential pros and cons of an acquisition of Pixar by Disney, and the exercise had revealed something pretty stark. The list of cons far outweighed the pros, at least in length. The risks loomed large. Fixing Disney animation would take too long. There would be cultural clashes, the potential price tag, and the sheer difficulty of integrating two creative powerhouses. It was, on paper, or on a whiteboard, a deal that should never have happened. Iger Seid, accepting what the list seemed to make obvious. Well, he said, it was a nice idea, but I don't see how we do this. Jobs, however, wasn't finished. The luminary that he was, he saw something on this list that Robert didn't.

Or he saw the list itself as something that Robert didn't. He looked at Iger and said something that would change Iger's perspective on business forever. A few solid pros are more powerful than dozens of cons. The deal, as we now know, went through, and it became one of the most successful acquisitions in corporate history, not only revitalizing Disney's animation division, but setting the stage for the company's creative resurgence. Most people, however, even some of the greatest business execs throughout history, would have walked away at the sheer sight of that laundry list of potential drawbacks of the acquisition. The losses felt too real, the risks too immediate, and yet jobs understood something that most never do. We are hardwired to overvalue the potential cons at the expense of potentially realizing major opportunity.

We hesitate, we protect, we hedge our bets, and in doing so, we often fail to see the magnitude of what's possible. But the wealthy, the builders, the creators, the money bosses of the world, they don't play not to lose, they play to win. Now, let me be clear, here's what I'm not saying. I'm not proposing that the wealthy are risk-tolerant thrill seekers who go out of their way to put their jobs, their capital and their very livelihoods at stake. I'm also not proposing that they take a look at one major opportunity on a whiteboard juxtaposed with 500 legitimate drawbacks on that same board and instinctively attach greater value to the one pro presented. What I am proposing is that the wealthy know something that the rest of us don't. They know how to properly value risk both on the upside and the downside, and they weight major positives more heavily than dozens of negatives. Let's take this thinking a step further. Loss aversion, or prospect theory, the cognitive bias presented and articulated by Kahneman and Versky, suggests that the average human feels about twice as much pain from losing something as they do pleasure from gaining something. For example, you would feel twice as much pain from losing 100 bucks of value in the stock market as you would feel pleasure from gaining that 100 bucks. I'd like to extend this thinking beyond just the actual feeling of when it happens and suggest that the true issue here is how many people attach this same aversion to the downside before they even know if this loss will take place. To extend this idea even further, I suggest the average person avoids taking on more risk because they have never truly seen or experienced the impact of long term gains, the power of compounding, or the way that business cycles reward those who endure over long enough time horizons. They only see what could go wrong, particularly in the short term, and they have experienced what can go wrong countless times. So they hold back, paralyzed by fear, and continue to improperly attach inappropriate value to both the upside and the downside. But the most successful people, the ones who build, invest, and create lasting wealth, are simply wired differently. They understand that every great outcome in life comes with a price, the discomfort of uncertainty. Yeah, it's not just markets that hate uncertainty. We all hate the fear of the unknown and tend to err on the side of caution, especially if we can justify said caution by writing out a long enough list of cons, aka excuses, not to act. I make lists like this all the time and I always err on the side of cons, so I do need to take my own advice on this one. It's time to flip the script. We need to spend far more time understanding the asymmetry of opportunity. How just one or two massive wins can and often does outweigh dozens of small losses. It's about making that pros and cons list and then waiting the pros list even more heavily to induce action. Because in the end, the people who build generational wealth aren't ones who made the safest choices. And again, I'm not proposing that the wealthy simply make overly risky choices on a daily basis. I am suggesting they're making the right ones more frequently because they know how to properly value opportunity when nobody else was willing to view it in the same way. Let's simplify this even further. Wealth building and business success don't operate on a one-to-one risk-reward scale. Many people assume that big risks equal big rewards, yes, but also that big failures are equally devastating. No, that's simply not how it works. Failing, for lack of more sophisticated language, can actually be quite fun. I do it all the time. Once we divorce its reality from any type of long-term personal or business setback, I have come to find great joy in failing at something. Anything, on a daily basis, reminding myself that even the act alone of putting something into motion or practice separates you, or me, from the masses who will never enter the arena in the first place. I always have to remind myself of that one when I get all the hecklers and all the trolls online. The wealthy understand that one great decision can far outweigh a dozen failures. The potential upside is disproportionately larger than the downside. Yet we continue to draw pros and cons lists without weighting the items appropriately. The best investors, entrepreneurs and creators don't win because they never lose. They win because their wins are so much larger than their losses that failure becomes just a cost of doing business. Think about this as it pertains to your own life for a moment. How many times do you put yourself in the way of failure each day? How many times do you embrace that failure simply as a cost of doing business and getting to the next rung of the ladder? The most striking proof of this concept in strictly financial terms comes both from venture capital and stock market investing, where a handful of huge wins can cover for dozens, even hundreds, of losses. Let's take venture capital asymmetry. A study by Correlation Ventures found that 65% of venture-backed startups returned less than the original investment. 65% less than the original investment. And only about 4% produced 10x returns or more. But those few outliers, companies like Google, Facebook, Airbnb, NVIDIA, etc. are so successful that they more than make up for all the failures, making venture capital one of the highest-returning asset classes despite, or perhaps because of, how few people take on such risk. Or let's consider stock market power law. In a study of the US stock market, a professor at Arizona State University found that between 1926 and 2016, just 4% of stocks accounted for nearly all the market's net gains. That really shouldn't surprise any of us. What is surprising, most stocks didn't beat treasury bills. The return on treasury bills, but the winners, the Amazons, Apples and Microsofts, delivered such astronomical returns that they made up for every laggard and loser in the index. Or consider the long-term market effect. In another study, Nobel Prize-winning economist Eugene Fama found that the longer you stay invested, the more the market rewards you. Since 1928, he found the S&P 500 has had a rolling 20-year periods where it has never lost money. Never, no matter what year you started investing. The key was staying in the game long enough for asymmetry of opportunity to work in your favor. So why do more of us not take advantage of this type of asymmetry? Or at least, why are we not taught to do so or to think this way? The problem is that the human brain, as we've seen, isn't wired for asymmetry. We're always looking out for what might harm us or leave us vulnerable. And this fear-based mindset traps people in a cycle of caution, keeping them from making the asymmetric bets that do create wealth. They may avoid investing in stocks because they fear a market downturn, even though long-term gains far outweigh short-term losses. They may never start that business because they worry about failure, even though they complain about their current jobs and incomes every single day. And they may hoard cash in savings accounts, justifying this behavior in the name of fiscal responsibility, because some potential imagined loss feels worse than missed opportunity. Yet these are the same people complaining about living paycheck to paycheck, the wealthy play by different rules. They understand this aversion to loss, and they most likely feel it just as heavily as you and I feel it from time to time. But they don't let it control them. They structure their decisions around asymmetric opportunities, and ask themselves the following questions regardless of the opportunity. One, what's the worst possible outcome?