Every position in this basket is sized to die quietly. If one goes to zero I will not write a post-mortem. I probably won’t notice until the quarterly cleanup. That is the design. It is also the only reason the other half of the design works: small enough to lose entirely, and still, if the tail shows up, large enough to change the year.
Most investors spend ninety percent of their effort on which names and ten on how much. I think that ratio is backwards for this kind of bet. A brilliant idea at 8% of the book can wreck you. A mediocre one at 0.4% cannot. A good idea at 0.4% with a 20x right tail... that’s the whole game.
The arithmetic is dumb enough for a napkin. Ten positions, half a percent each, five percent of the portfolio total. Seven go to zero. Minus 3.5%. Two do nothing. One does 15x: the half point becomes seven and a half, a gain of seven. The basket added 3.5% to the whole portfolio while being wrong seventy percent of the time. The one winner outweighed every loser combined, twice over, because the losers were never allowed to get big. Batting average is a vanity metric here.
One caveat before the names, because it matters. Buying out-of-the-money calls and warrants does nothing for expected return on its own. You’re paying premium. Premium decays. Most of it will. The convexity only pays if there’s a real catalyst inside the option’s life, the entry price is sane, implied vol isn’t already pricing the miracle, and dilution or a liquidity trap doesn’t eat the exit. Several of these I expect to lose. I hold them anyway. That sits fine with me.
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