Shooting Fish in a Barrell Versus Shooting for the Stars

Dear investor,

I hope this message finds you well.

Investing often boils down to a philosophical divide: Do you bet on high-risk, high-reward companies that might change the world, or do you invest in already profitable businesses with predictable returns?

It’s the difference between shooting fish in a barrel - picking from an easier, more certain opportunity set - and shooting for the stars, where the payoff is massive but so is the likelihood of missing entirely.

The kind of stocks you choose determines the repeatability of your success.

To put this into perspective, let’s compare Tesla and McDonald’s.

Shooting for the Stars: The Tesla Bet

Investing in a company like Tesla in its early years is like shooting for the stars. If you succeed, the reward is immense - Tesla’s meteoric rise from an unprofitable EV startup to a trillion-dollar giant rewarded early investors handsomely. However, many companies in a similar position - promising revolutionary products but burning cash - never make it. Think of Fisker, Nikola, or even WeWork.

The challenge with this approach is that you have to be exceptionally skilled at identifying which unprofitable company will become a giant. Most investors will get it wrong more often than they get it right.

The biggest danger? Survivorship bias. People celebrate Tesla but forget the graveyard of failed companies that aimed high and crashed. If an investor only looks at the successes, he might believe unprofitable companies with a new business idea are the best bets, without realizing the odds are overwhelmingly against them.

Data from past market performance suggests that while a small fraction of these companies go on to become major success stories, the vast majority either stagnate or fail completely. Even the industries that have produced the most high-growth stocks - biotech and software - are also the ones with some of the highest failure rates.

Betting on Tesla in its early days was incredibly risky, as many other ambitious EV companies failed along the way. Yet, for every Tesla, there are countless startups that never make it past the early hype.

Shooting Fish in a Barrel: The McDonald’s Approach

McDonald’s is the example of a profitable, established company. It’s a global fast-food giant with a proven business model, consistent cash flows, and a strong brand that has stood the test of time. Investing in companies like McDonald’s is like shooting fish in a barrel: the target is clear, the odds of success are high, and the process is repeatable.

McDonald’s generates steady revenue through its franchise model, which requires minimal capital expenditure and provides predictable earnings. Its profitability is not dependent on speculative growth but on operational efficiency and market dominance.

For an investor, McDonald’s offers stability and reliability. The company pays dividends, which can be reinvested or used as a source of passive income. Its stock price may not skyrocket overnight, but it is less likely to collapse during market downturns.

Buying already profitable companies removes much of the guesswork. Profitability itself is a strong indicator of business durability - companies that consistently generate cash have already proven that they can succeed in the real world. Investors in McDonald’s aren’t waiting on regulatory approval, technological breakthroughs, or a paradigm shift in consumer behavior.

The key advantage of such a strategy is repeatability. While there will always be fluctuations, investors can reliably identify profitable businesses with strong competitive advantages.

The Importance of a Repeatable Stock Selection Process

The difference between these two approaches lies in the repeatability. Investing in already profitable companies like McDonald’s is a repeatable strategy.

It relies on fundamental analysis, historical performance, and established metrics like price-to-fcf ratios, dividend yields, and return on equity. These metrics provide a clear framework for evaluating investments, making it easier to identify similar opportunities in the future.

In contrast, investing in unprofitable companies like Tesla requires a different skill set. It involves assessing intangible factors such as visionary leadership, technological innovation, and market potential. While this approach can yield extraordinary returns, it is far less repeatable.

Identifying the next Tesla is incredibly difficult, as it requires predicting which unprofitable companies will succeed against the odds. For every Tesla, there are countless failures that never achieve profitability or deliver returns to investors.

This isn’t to say that one strategy is always better than the other. If you’re a venture capitalist or an expert in disruptive industries, you might be comfortable making asymmetric bets on high-risk, high-reward companies.

But for most investors - especially those managing their own portfolios - focusing on already profitable businesses is the safer and more repeatable path to wealth.

Conclusion: Play the Right Game for Your Goals

It isn’t just about picking individual stocks; it’s about playing the right game. If your goal is to find the next high-growth disruptor, you need to accept that you will be wrong far more often than you’re right.

As investors, we must recognize that not every shot will hit its mark. By focusing on the right group of stocks - those with strong fundamentals and a history of profitability - we can increase our odds of success and build a sustainable investment strategy.

Shooting fish in a barrel may not be as glamorous as shooting for the stars, but it is often the smarter choice in the long run.

On top of that investing isn’t just about finding winners - it’s about creating a process that allows you to win consistently over time. And if you’re not an insider of a new industry, better stay away from it.

As Warren Buffett put it:

Choose wisely.

Until the next issue. 🥂

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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.