Losing to Win: A VC Lens Will Find the Next Nvidia

In the second half of 2009, Chief Rule Breaker David Gardner made a run of recommendations in Stock Advisor that, judged individually, look unremarkable at best. Adobe (NASDAQ:ADBE), selected in August, lags the S&P 500 by roughly 280%. Dassault Systèmes (OTC:DASTY), recommended the following month, trails the market by more than 500%. Hasbro (NASDAQ:HAS), selected that October, lags by roughly 460%. These three recs have failed to beat the market by some considerable distance.

Bookending that run of Adobe, Dassault, and Hasbro were Interactive Brokers (NASDAQ:IBKR), recommended in June, and Nvidia (NASDAQ:NVDA), recommended that December. Interactive Brokers fares far better than the middle three. It is beating the market by more than 2,300 percentage points. Nvidia, recommended at a split-adjusted $0.38, has done better still: Shares trade today at $228.87, outperforming the S&P 500 by more than 58,000 percentage points.

Run the math on that five-stock basket. Excluding Nvidia, the average performance relative to the S&P 500 across Adobe, Dassault, Hasbro, and Interactive Brokers works out to roughly +270% -- a number that looks solid, but only because Interactive Brokers is doing all the work for three underperformers. Add Nvidia to the mix, and the basket's average relative performance rockets to more than 11,800%.

You don't need to be right often. You need to be right once or twice in every five, loudly.

The goal is making sure that when you're right, you're right enormously.

Finding Tomorrow's Leaders Today

That's the mechanism David constantly points back to. He likens the Rule Breaker investing approach to venture capital investing, in which firms know that most bets won't pay off, yet they keep swinging for outsize winners rather than safe, modest ones. Part of why he's willing to make that bet is a bias toward first movers in emerging industries -- companies positioned to still be relevant or dominant 10 years out. As he puts it, "We lose to win." The goal is making sure that when you're right, you're right enormously.

That's why The Motley Fool now recommends holding at least 50 stocks across many different industries. Fifty stocks provide a massive buffer against volatility; if one segment of a portfolio takes a hit, other areas of a perfectly balanced, multi-industry portfolio help offset the decline. It also means holding more losing investments along the way, but that's the trade-off. With a wide enough net, the handful of Nvidias a portfolio eventually catches can drive returns that no number of "safe" picks ever could.

That's been true for the S&P 500 over time -- and it's precisely how services like Stock Advisor aim to beat it: by recommending enough stocks that Fools can build a 50-plus stock portfolio they're comfortable owning, one in which a few outsize winners can do far better than simply carrying the rest.

The Motley Fool has positions in and recommends Adobe, Dassault Systèmes Se, Interactive Brokers Group, and Nvidia. The Motley Fool recommends Hasbro and recommends the following options: long January 2027 $43.75 calls on Interactive Brokers Group, long January 2028 $330 calls on Adobe, short January 2027 $46.25 calls on Interactive Brokers Group, and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.