I bought four stocks this morning. I expect three of them to fail.
That isn’t a confession. It’s the business model, and I’d rather explain it than have you find out by reading the scoreboard in December.
Thomas Edison tested thousands of filament materials before carbonised bamboo held a charge for more than a few hours. His line on his process was five words long: to have a great idea, have a lot of them.
Every investor worth their salt, I’ve ever met would nod at that.
But almost none of them run money that way. They run five or ten positions they can defend at a dinner party, each one a thesis, each one loved, and they wait. Then they wonder why the year produced nothing, and they blame the market.
The market didn’t do it. The flawed approach did.
Say one idea in ten becomes the kind of winner that carries a year. I think that’s about right for anyone doing real work, and it’s flattering for most. Now count the shots.
Five ideas in a year: a 41% chance you caught one. Twelve ideas: 72%. Thirty ideas: 96%.
The dinner-party investor with five loved names has a coin flip’s chance of owning the year’s winner at all, and he’s paid for that coin flip with all of his conviction. The person running thirty scruffy ideas through a decent process has nearly a certainty, and paid for it with a lot of small, boring, forgettable losses.
Peter Lynch owned 1,400 stocks at Magellan at the peak. People laughed at it then and still do. Lynch’s answer was that the person who turns over the most rocks wins the game, and he put up the best public record of his generation doing exactly that. He wasn’t smarter than the fund next door. He looked at more things.
Here’s what the losses cost. Take thirty ideas, each a 1% starter, and cut the ones that fail at a 10% loss, which is roughly where my exits sit. Twenty-seven failures cost 2.7% of the book across the year. One survivor that is 3xed to 3% of the book and triples pays for all of them twice over.
So my job isn’t picking. It’s throughput and discipline, in that order. Generate more than feels comfortable. Buy a small piece of ideas that earns a second look, so I actually want to watch it. Write down the date and the number that ends it before the first share is bought. Then let the calendar do the killing, and let whatever survives the calendar get bigger.
Four went in this morning. Each one would get laughed out of a committee, and I can give you the sentence that does it.
The first: “AI is going to eat this thing.” The market said it in February and the stock lost a third of its value in one session. The AI builders are now its largest customers, and last quarter it made an operating profit for the first time in its life.
The second: “The regulator rejected them three times.” The regulator rejected the building. The three letters said so, in writing, and found nothing wrong with the drugs. The building passed reinspection in July, and the three decisions are due in the first week of December. My base case says the shares are worth a fraction of today’s price and my bull case runs to double it, which is why it’s 1% and not 5.
The third: “It trades in a jurisdiction half your readers have sworn off.” Fine. It also trades below the cash in its own bank account, so you pay about $67 million for a business doing close to a billion dollars of revenue, and the founder who controls the votes has been buying it cheaper than I did. He’s also the reason it stays at 1% until a few specific things change.
The fourth: “It’s already up 150% this year.” It is. It’s also 93% below its 2021 high, and there’s an accounting charge of about $105 million a year that rolls off between this year and next and adds four points of margin without the business growing a dollar. Nobody’s priced that yet. They’re too busy looking at the 150%.
Everyone wants the tenth idea. Nobody wants the nine that bought it.
But the ideas are so good that they’re for our paid members only.
Babylon Burns is $399 a year or $49 a month. One idea that works pays for that a dozen times over, and the point of this letter is that you don’t get the one that works without paying for the nine that don’t. If you want a single ticker with a story you can repeat at dinner, this isn’t for you. If you want to watch thirty ideas a year go through a machine that kills most of them in public, and own the survivors before anyone’s calling them survivors, that’s the whole reason it exists. Substack gives you seven days to read everything and take your money back, so read the four dossiers first and decide after.
Find alpha or die tryin’.
