05 Jul Picking Up Pennies in Front of Bulldozers
Picking Up Pennies in Front of Bulldozers
July 5, 2017
Have you heard that phrase?
Don’t pick up pennies in front of bulldozers.
It’s a good one. It’s good because it’s easily visualized and easy to agree with.
Yes, it does sound foolish to pick up a penny in front of a bulldozer. What if the bulldozer runs me over? That is scary. I do not want to do that.
This is one piece of unchallenged, regurgitated trading advice that is definitely worth listening to.
Except it isn’t.
First, let’s look at exactly what this advice is trying to tell us.
The saying is attempting to stop us from taking small profits in our trading (or business) if the amount we can lose is high. No need to try to pocket millions of pennies if the cost of losing is being bludgeoned by a big earth-moving object? This seems like common sense.
No, what we should do is the opposite. We should aspire to give up winning millions of pennies in order to get a massively huge win. That’s what the big boys do. The only way smart people run in front of a bulldozer is to pick up a space shuttle.
Except that’s not true.
While perusing the 2016 list of the richest people in America, I found something interesting. Three people ranked in in the top 13 are all from the same family and all derived their riches from one company: Walmart.
And the combined riches of the three Walton family members on the list? $106.5 billion.
Wait, how does that Walmart company do its business?
It tries to pick up pennies in front of bulldozers.
For example, Walmart might buy an item for $24. Because its business model is to try to sell a ton of items at a very discounted price, it might then sell that item for $25.
If that item doesn’t sell, Walmart is out $24. If it does sell, it makes $1.
Whoa, I thought the big boys didn’t do that. I thought the best way to do business is to buy it for $1 and sell it for $25. Isn’t that right?
Walmart believes that selling a boatload of items for a very small profit is a smart thing to do. Walmart believes that making pennies on millions of objects is achievable and profitable, even though they’re risking way more than they make if certain items don’t sell.
Is Walmart right? Is going for small profits while risking big losses profitable?
$106.5 billion says they might be on to something.
What does that mean for our trading?
It means that going for small profits while risking big losses is a perfectly viable strategy–despite what the low risk, high reward people scream at the top of their lungs.
The key, of course, is to make sure that we’re not taking big losses all the time.
If Walmart buys one hundred items for $20 and only sells 10 of them for $21, that’s bad business. That’s a lot of cost and only a little profit. The bulldozer wins.
If Walmart buys one hundred items for $20 and sells 96 of them for $21, that’s extraordinary business. Profit will always outweigh the costs. The penny-picker wins.
The same goes for trading. If our win percentage is below 50%, then going for small wins will only drain our accounts. If our win percentage is well above 50%, then going for small wins will be profitable indefinitely.
The truth is: as long as we sell our inventory at a high rate, we can have three people in our family worth $100 billion, even if we only make a little on each item.
Likewise, as long as we win at a high percentage rate, we can be very profitable in our trading, even if we only make a little profit on each trade.
Despite what the experts say, picking up pennies can make us rich, as long as we don’t get run over very much.