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“I swing big, with everything I’ve got. I hit big or I miss big.”

— Babe Ruth, on investing

Crypto’s indisputable use case: High-variance outcomes

The great Babe Ruth popularized baseball in the 1920s by swinging for the fences, but it wasn’t until the Moneyball analytics revolution 100 years later that everyone started doing it.

While Ruth hit 60 home runs in 1927, his teammate, Lou Gehrig, was the only other player to hit more than 30.

This year, by contrast, 18 MLB players managed more than 30 home runs, as seemingly every hitter is now swinging as hard as they can — because that’s what the Moneyball math tells them to do.

But it’s not just baseball that’s embraced high-variance outcomes.

Basketball players are shooting more 3s, football teams are going for it on 4th down more frequently, golfers are driving the greens, and tennis players are attempting more winners.

Even Jeopardy! contestants are embracing high-variance outcomes by opting for Daily Doubles more often, according to the lively comments section of a Tyler Cowen post on the topic.

The stock market, however, is going in the opposite direction.

For public market investors, the opportunity for high-variance outcomes is shrinking as startups stay private for much longer than has historically been the case.

Annoyingly, some of the most prominent startups such as Stripe and SpaceX seem willing to stay private forever, even. 

This reduces investors’ odds of getting in early on the next Microsoft or Amazon, both of which sold shares to the public at an early stage of their development and at surprisingly reasonable market capitalizations — just $400 and $700 million, respectively.

Still-private SpaceX, by contrast, is already valued at $210 billion.

As an investor, it’s a lot harder to strike it rich from an in-price of $210 billion than it is from an in-price of $400 million.

Investors have far fewer of these chances, too: There were 677 US IPOs in 1996 vs. just 54 in 2023 — barely one a week!

Of the chances we do get, most appear to be fully priced with far more new listings trading down from their IPO price than I can ever remember (and that despite the overall market marching relentlessly to new all-time highs). 

The rest of the market may be fully priced, too — by some measures, US stocks are the most expensive they’ve ever been.

For better or worse, this has created the perception that stocks are no longer a place to get rich quick, and that is partly what’s been pushing professionals into high-variance alternatives like venture capital and retail investors into high-variance gambles like crypto.

In the case of bitcoin, this is at least partly by design.

Per the authors of “Resistance Money,” Satoshi’s choices on fixed issuance and abrupt halvings may have been a deliberate attempt to create headline-grabbing price swings: “It appears that Satoshi endowed bitcoin with the potential, early on, for bitcoin to enjoy more volatility than was strictly necessary.”

Intentional or not, that did the investing world a favor because with IPOs down and stock prices up, our portfolios are in dire need of more high-variance outcomes.

This is not just for entertainment purposes. 

In his most recent research note, Cliff Asness explained why we should be making more investments with an expected return of negative 100%.

“Imagine you had an investment that each year would either double with a 2/3 probability or go to zero with a 1/3 probability. Further imagine that the outcome is independent from anything else in the portfolio (“uncorrelated”). I don’t think many investors would want this as their whole portfolio, as the expected compound returns are clearly -100%. But, hopefully everyone would say “I want some of this in my portfolio.” They’d do some every year and just reload back to the original amount after either doubling or going to zero on that presumably modest portion. Putting that modest amount in this hypothetical investment should be a no-brainer.” 

In other words, like athletes and Jeopardy! contestants, investors should be swinging for the fences more often.

Crypto, if nothing else, offers many such pitches to swing at.

— Byron Gilliam

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