Frequency Vs Magnitudes

If you are allowed to choose one between high frequency of success with low magnitudes and low frequency of success with high magnitudes. What will you choose?

We like to win more and frequency matters a lot for us. We may end up choosing the first option. However, we ignored the magnitude part. It is not just about winning. It is about winning big. Magnitude matters a lot. One win can cover up all your past losses and vice versa.

Let explore baseball to understand more. Though, I am not a baseball fan. But intrigued about one of the greatest players of the game, Babe Ruth. He held the world record for the most home runs during his era. Only a few of the other players are able to break it. Additionally, he also held the world records for highest strikeouts for a longer period of time. Having played 22 seasons with 714 career home runs and 1,330 strikeouts out of 10,622 pitches

“How to hit home runs: I swing as hard as I can, and I try to swing right through the ball… The harder you grip the bat, the more you can swing it through the ball, and the farther the ball will go. I swing big, with everything I’ve got. I hit big or I miss big.”

–Babe Ruth

He was known as king of Strikeouts for many years. His strategy was simple go hard and big. It worked out for him.

The term “Babe Ruth Effect” was born from Ruth’s principle of go all or lose everything.

The effect is widely seen in the investing world. You have known Masayoshi Son, CEO of SoftBank. His company’s valuation crossed the mark of $200 Billion during the tech bubble. However, it lost 99% of its value and became a $2 Billion company. He himself lost all his wealth of around $ 70 Billion. There is still a twist left. One of his investments, in a Chinese Tech giant of worth of $20 million worked out for him. Even after selling billions of dollars of Alibaba stock, the investment today is worth more than $ 100 Billion. That one bet covered up almost all the loses.

The strategy may not work out for us. But if we see the Venture Capitalist around. The frequency of success is very less. 30% of the companies almost fail. On other hand less than 10% of the companies skyrocket like FB, Amazon, Tesla and more. The success rate is very low but the magnitude is way higher and it cover up all the lost.

Go Big, Sky is the limit

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The strategy may not workout in some scenarios, where all your investments end up on the wrong side. Be skeptical, and analyze your odds before using the Go Big strategy.

In the long run, the magnitude is what matters the most. It matters way less how many times you win or lose.

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