One Wang Xing for three Chen Ou, one Didi for ten Xiaohongshu

Suppose you participated in three games, and there are two possible outcomes:

1. Two nominations, one win
2. Three nominations, but all the time runner-up

How would you choose?

Everyone knows that second place is not remembered. Not to mention three times, even if you get second place ten times, the result will probably not be as good as getting first place once.

The first place will get richer financial rewards and more room for imagination. After all, which event would want a guest who introduces himself as "I have won second place ten times" rather than "the champion of a certain competition"?

The essence of this problem is actually: success has two dimensions, one is amplitude and the other is frequency. When it comes to success in the secular sense, magnitude is often more important than frequency. So being first once is better than being second countless times.

This leads to the question in the title: if you are an entrepreneur , would you like to be Wang Xing once, or would you like to be Chen Ou three times? If you were an investor , would you rather invest in Didi once or in Xiaohongshu ten times? (Of course, both Chen Ou and Xiaohongshu have achieved great success.)

For Wang Gang, even if his future investments fail, he will still be the angel investor of Didi and will still be more successful than most investors.

Human beings’ definition and memory of success are sometimes so cruel.

Babe Ruth is the most famous baseball player in American history. In the hearts of many Americans, his status even exceeds that of Ali or Jordan.

He was the first person in history to hit 60 home runs in a season, a record that stood for 34 years;

He hit 714 home runs throughout his career, a record that stood for 39 years;

But at the same time, he has another record. He was struck out 1,330 times in his entire career, and this record lasted for 29 years.

Babe Ruth gave up hits with higher "frequency" and greater probability, and relentlessly pursued home runs with lower probability but greater "amplitude", which truly practiced the words quoted in the picture above: "Hit Big or Miss Big".

This made him the most famous athlete in American history and also left people with the Babe Ruth Effect - people who pursue success should take greater risks and get higher returns.

This effect is also constantly used in the VC industry.

Peter Thiel once said that there are astonishing deviations in the returns of different projects in the VC industry. VCs that do not perform well often have an illusion that all projects are similar, but in fact the returns of projects conform to the power law, which means that the very top few projects will ultimately bring the largest returns. The sooner you figure this out, the more likely you are to be a good VC.

A16Z partner Chris Dixon once summarized the following results based on the data provided by his investors:

In the above figure, the horizontal axis is the fund's return multiple, and the vertical axis is the proportion of projects with returns greater than 10 times among all projects. It can be seen that the better the fund performs, the greater the proportion of projects with returns greater than 10 times.

The horizontal axis of the above figure remains unchanged, while the vertical axis becomes the specific return multiples of projects with returns greater than 10 times. It can be seen that the return multiples of the "home run" projects of the well-performing funds can be as high as nearly 70 times.

The last picture is more interesting. The horizontal axis remains unchanged, but the vertical axis becomes the proportion of failed projects. It can be seen that nearly 80% of the projects of failed funds with a return of less than 1 times are failed, while the probability of failed projects of funds with a return of 2-5 times is reduced to about 40%. However, the failure rate of projects of funds with a return of more than 5 times will increase again.

This shows that funds that truly pursue unicorns need to have a higher tolerance rate. It's like Babe Ruth, who was willing to take more strikeouts in order to hit a home run.

But does this mean that everyone can take risks in pursuit of success without responsibility?

In fact, in the decades since Babe Ruth retired, there have been a lot of people in the baseball field who have practiced his Ruth effect.

In 2012, 136 players struck out 94 or more times, a number that was the most strikeouts in a single season by a baseman in Babe Ruth's career. But none of those 136 guys actually hit a similar number of home runs or produced the same number of wins.

To study this issue thoroughly, I found historical data on Babe Ruth. I compared his home run and strikeout ratios, which are the ratios in the last row of the table above. The higher the ratio, the more likely a home run is. The bold parts are some obvious differences:

• In 1919, the ratio of home runs to strikeouts suddenly increased from 19% in the previous year to 50%, which was a qualitative change. The historical reason is that, before that year, Babe Ruth had been used primarily as a pitcher and part-time hitter. In 1919, Babe Ruth went to the team coach and said, "I can only do one of these two things," so the coach asked him to focus on hitting. This shows that choice is sometimes more important than hard work. If you choose the right direction for yourself, the probability of success will increase significantly.
• In 1922, the ratio suddenly dropped from 73% to 44%; in 1925 it dropped further to 37%. I researched the situation and found that he was at the height of his career in 1922, signing new contracts for an astronomical number of dollars, and from then on he was said to have started drinking heavily, until 1925, when he was divorced and was hospitalized for six weeks. This may explain that when everyone is experiencing the peak of life, especially when they reach the peak suddenly, it is also the time when they are most likely to make mistakes.
• Before 1932, we can see that Babe Ruth's home run rate increased year by year, reaching an astonishing 90% in 1931, which means that almost every time he was struck out, he would hit a home run the next time. By 1932, that figure had dropped to 66%, a normal late-career performance. On the one hand, this shows that the probability of success can be increased through hard work and time; on the other hand, it shows that people should seize opportunities and do things that maximize benefits while they are young.

Back to investment. Many people think that truly good investors do not rely on luck, while others say that those who rely on luck are young and inexperienced. But in fact, I divide all things in the world into three categories:

1. Things that only concern yourself, such as fitness and memorizing words, do not rely on luck at all. As long as you work hard enough, you will reap rewards and succeed.
2. Random events that are only related to external factors, such as throwing dice or betting on big or small points, ultimately rely entirely on external probability no matter how hard you try.
3. It is related to both oneself and the outside world, such as Texas Hold'em, investment, and most other things. The final outcome of such things depends on luck, because as long as there are external factors, you will never have a 100% probability of achieving something. All different people can do is to increase their probability of achieving a certain result, that's all.

So it is true that most things depend on luck. Therefore, most events in society are probabilistic events.

Now that we have reached this conclusion, calculating the mathematical expectation is the most important and scientific method when making choices about these probabilistic events.

Nassim Taleb, the author of "The Black Swan", once gave an interesting example in his other book "Fooled by Randomness".

Once, a colleague asked Nassim Taleb, "How do you think the trend of a certain stock will be?" Nassim replied, "There is a 70% chance that it will rise." However, the colleague discovered that Nassim was shorting the stock and asked him if he was kidding him.

Nassim used the above picture to explain that there is indeed a 70% probability that the stock will rise, but the increase may only be 1%, while the 30% probability of falling corresponds to a decline of -10%. If the mathematical expectation is calculated in this way, the expectation of buying a rise is: 70%*1%+30%*(-10%)=-2.3%.

Therefore, although an increase in price is a high-probability event, the expected result of buying on a dip is better. This is the expected value.

Many times, being a VC also requires considering expectations. For example, ofo and Mobike, some people don’t understand why so many institutions are flocking to them. Simply put, although the probability of failure is high (but which startup company has a low probability of failure?), once successful, it is likely to bring amazing returns, so the expectations are high and it is worth investing.

Finally, we all know that the more times a probabilistic event is repeated, the closer the event itself will be to probability. Just like throwing a dice, the more times you throw it, the more average the six numbers will be.

The above chart is a statistics of Mattermark's follow-up financing of some of the invested companies from 2009 to 2012. From this we can see that on average only 0.3% of the projects can eventually get to the F round. Of course, some companies may be acquired, some may not even need to raise an F round, and so on. We might as well irresponsibly assume that the probability of a invested company's successful exit is 1%. Assuming that a good professional investor's performance level can reach 20 times the average, then the probability of a successful exit from his investment is 20%. In this way, the fund must invest in at least 5 projects before it can have an exit.

For a fund with little money, under this probability, if the number of investment companies is not large, it is very easy to throw money away without any effect. So there are always people saying that the number of bullets is very important when it comes to investing.

Just like people who play claw machines, the coins they put in at the beginning are all paving the way for the coin that will get them the doll in the end. If you don’t have enough coins in your pocket and enough opportunities to try, you will become a stepping stone for others to achieve their goals.

So, to summarize:

1. The magnitude of success is often more important than the frequency.
2. But the pursuit of success does not mean simply pursuing high risks, but rather pursuing high expectations.
3. In order to achieve high expectations, in addition to choosing the direction of greater returns, you must also constantly train yourself and strive to increase the probability of achieving ideal results.
4. No matter how high the probability is, it is not an inevitable event, so you must leave yourself enough bullets and enough opportunities to try.

But in fact, if you remember the last sentence of the Babe Ruth quote in the picture, you will find that all of the above has a loophole.

Babe Ruth said in the last line, “I like to live as big as I can.”

This sentence is the main premise of the whole article, that is, you want to be the most successful person.

But actually, if you don’t want to, that’s probably fine too.

Who says that people have to live such a hard life?

Just different choices.

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