How To Succeed By LOSING More Often Than You Win
By Anna Johnson on January 4th, 2010It seems unlikely doesn’t it? The idea that success should come from LOSING more often than you win. But it’s not only possible, it may well be probable. It’s certainly how many successful people and companies – from futures traders to movie studios to pharmaceutical companies – make their money.
There are two core principles behind this idea – or should I say, reality:
1. The more things you try, the more results you’ll get – good and bad.
Unless you can predict the future, you can never really know that something – e.g. a business – is going to pay off. Therefore, you have to try a lot of things. The more things you try, the more ‘results’ you’ll get. For many business owners a pattern starts emerging where, out of 10 projects, a few will fail miserably, a few will return mediocre results, and a few will succeed spectacularly.
Depending on how uncertain is the field you’re in (futures trading, making movies and developing pharmaceuticals being among the most uncertain), you may well find that half or even most of your initiatives tend to fail. But the reality is that you have to try a lot of things to yield the winners.
2. Cut your losses short and let your winners run.
It doesn’t matter if most of your initiatives are failures or mediocre performers… as long as you stop investing in the losers and poor performers – i.e. cut your losses short – and pour all your remaining resources into the winners, i.e. let your winners run.
Let me prove this to you with a little math.
Imagine you have $100 to invest in 10 different projects. You start off by allocating $5 to each. After a short while, it turns out that nine of the projects are losers, which means you lose $5 per project and $45 in total. One of these projects is, however, a huge success and gives you a 400 percent return on investment (ROI), making you $25.
So where are you at? You’ve made $25 and lost $45, resulting in a net loss of $20.
Ahhh, but you’ve still got another $50 to invest, haven’t you? Where do you put that money? In the one project giving you a 400 percent ROI, of course! As a result of doing that, you put in $50 and make a whopping $250.
Which means, in total, you’ve made $230 on your initial investment of $100 – a 130 percent ROI overall.
This isn’t quite as good as if you put all your money into the single winning project, but the reality is you that never knew – and were never going to know – which of the 10 projects was going to win, let alone win big.
In real life, you probably do have a slightly better inkling about which businesses, products, services, etc are likely to pay off. Plus, things won’t necessarily be as simple or as straightforward as in this example. But you can see the power of cutting your losses short and letting your winners run (or reinvesting in your winners). You don’t need to succeed all or even most of the time, as long as the magnitude of your successes far outweighs the magnitude of your failures.
