Buffett once admitted that only 12 key investment decisions truly moved the needle for Berkshire Hathaway’s success. Mohnish Pabrai estimates that these represent just about 4% of Buffett’s total investment choices, that made him the world’s greatest investor.

In Pabrai’s "Ten Commandments of Investment Management," the third commandment is: "Thou shall accept that thou shall be wrong at least 1/3 of the time." Similarly, Sir John Templeton once told William Green in an interview that he expected at least one-third of his ideas to go against common sense. This reminds us that even investment geniuses make mistakes about a third of the time. Our ability to pick stocks may be little better than a coin toss.

It’s challenging to pick stocks when Mr. Market is in a good mood, as even average companies become overpriced. His infectious emotions make it no easier when he is fearful or distressed.

Investment Logic

To succeed, it’s essential to stay engaged with the market, as high-opportunity days are rare (often less than 10%). Missing these days can significantly impact returns. While adjusting cash levels is wise, always maintaining some market participation is crucial.

Uncertainty is inherent in both investing and life, which is why I allocate part of my portfolio to highly diversified index funds while placing selective bets on individual stocks, real estate, or other opportunities. Any position over 10% of the portfolio should be taken with the understanding that there’s at least a one-third chance of error. Focusing on opportunities with a positive expected return is vital.

Only accept asymmetric opportunities and pay close attention to expected value calculations:

Expected Profit = 10% × Leverage × (2/3 × Expected Profit Rate − 1/3 × Expected Loss Rate)

For high-risk investments (with a potential downside of -100%), the expected return should be at least 50% within a year, or it’s a poor opportunity. Debt leverage, if used, must be managed carefully; an exposure initially at 10% can quickly harm total assets if the investment goes wrong.

In real estate, leverage is beneficial but must be used cautiously. After property appreciation, refinancing is an option, but I keep total debt below 60% of the property’s current value. For example, if a property originally worth $1 million with an $800,000 loan appreciates to $1.5 million after ten years, and the loan balance is now $500,000, I would limit additional borrowing to $400,000, keeping the total debt under $900,000.

Longevity can be achieved is play the probability game consciously.