Context: Why Speculative Positions on a Growth Investing Site?
This site focuses on growth investing — the careful selection of high-quality compounders that can generate wealth over decades. The core of the approach is finding businesses with durable competitive advantages, high returns on capital, and long runways for reinvestment.
But even a disciplined growth investor may hold a small allocation to speculative positions. These are not compounders — at least not yet. They are asymmetric bets: stocks with a small probability of massive returns and a significant probability of failure.
Why own them at all? Because the mathematics of wealth creation are brutally skewed.
The Bessembinder Reality
Hendrik Bessembinder’s research revealed an uncomfortable truth: the majority of individual stocks underperform Treasury bills over their lifetime. Wealth creation in the stock market is concentrated in a tiny fraction of stocks. The top 4% of companies account for all net wealth creation. The rest, collectively, add nothing.
This is skewness in action. The distribution of stock returns is not a bell curve. It is a power law — a long tail of massive winners pulling up an average that most stocks never achieve.
For the growth investor focused on compounders, this research validates the approach: find the rare winners and hold them. But it also raises a question: what if you’re not certain you’ve found one?
Two Categories of Growth Positions
I distinguish between two types of growth holdings:
Compounders are businesses with proven engines of value creation — consistent high returns on capital, reinvestment opportunities, and durable advantages. When you own a compounder, the correct behavior is inaction. You let it compound. Selling is almost always a mistake. If you have high conviction that you own a compounder — or a future 100-bagger — the right approach is the coffee can: buy, hold, don’t touch, check back in ten years.
Speculative positions are asymmetric bets with unproven durability. They might become compounders. They might deliver 100x. They might go to zero. The distribution of outcomes is wide, and your conviction is necessarily lower.
The challenge is that the line between these categories is not always clear. A stock may look like a future compounder but lack the track record to confirm it. You believe in the thesis, but not enough to bet everything on it.
This is where the 50/50 Rule applies.
The Speculative Dilemma
You own a speculative stock. It’s up 50%. Now what?
The conventional options are unsatisfying.
Hold forever (the coffee can). Buy and never sell. Let it become a 100-bagger or go to zero. This is the right approach when conviction is high. But what if your conviction is moderate or low? What if you’re not sure this will become a compounder? What if the thesis is intact but unproven?
Sell everything. Lock in the gain. Move on. This feels prudent, but you’ve eliminated the only reason you bought the stock — the asymmetry. If it does 100x from here, you’re not there. Given the skewness of returns, selling your potential winners is expensive.
Sell only your cost basis. Let the “house money” ride. This is elegant in theory but limited in practice. If you’re up 50%, you’re only selling two-thirds of the position. The capital freed is modest. The asymmetry reset is minimal.
There is a fourth option.
Shannon’s Demon and Volatility Harvesting
Before presenting the rule, a brief detour into an elegant concept.
Claude Shannon — the father of information theory — proposed a thought experiment. Imagine a stock that randomly doubles or halves each period, with equal probability. The expected return is zero. But Shannon showed that if you rebalance to 50% stock and 50% cash after each move, you generate positive returns from pure volatility.
This is Shannon’s Demon: extracting returns not from the direction of price movement, but from its oscillation. The practice of systematically capturing gains from volatile assets is called volatility harvesting.
The rule I use for speculative positions is inspired by this logic — but with a critical difference.
Beyond Shannon: The Consumption of Asymmetry
Shannon’s Demon operates within a single asset. You rebalance between stock and cash, then re-invest in the same stock. The expected return of each coin flip remains constant.
Speculative stocks don’t work this way.
When you buy an asymmetric position, you’re buying a distribution of outcomes — most negative, a few spectacular. That asymmetry is not constant. It gets consumed.
A stock that has risen 50% has already captured part of its potential. The remaining upside, measured in percentage terms, is smaller. The mathematical asymmetry has diminished.
Consider: a $10,000 position in a stock at $10 with 100-bagger potential has a theoretical upside of $1,000,000. If the stock rises to $15, your position is worth $15,000 — but the 100-bagger target is still $1,000. The remaining multiple is now 67x, not 100x.
Your dollar has less asymmetric potential than it did before.
This is the law of diminishing returns applied to optionality.
The 50/50 Rule accounts for this. Instead of rebalancing into the same asset, you free capital to be deployed elsewhere — into a fresh position whose asymmetry is intact.
You’re not just harvesting volatility. You’re recycling asymmetry.
The 50/50 Rule
When a speculative position rises 50%, and your conviction that it will become a compounder or 100-bagger is low to moderate, sell exactly half.
Not half your profit. Half your position.
50% gain. 50% sold. Easy to remember. Easy to apply.
This accomplishes something precise:
The first half captures the realized gain. That capital is freed — available to be redeployed into a position with fresh asymmetry, into a compounder, or into cash.
The second half stays. If the stock becomes a 100-bagger, you participate. You own less of it, but you still own it. The asymmetric option remains open.
The Key Condition: Conviction
The rule hinges on conviction. This is the honest question you must ask yourself:
Do I believe this stock will become a compounder or a 100-bagger?
Predicting this is difficult. Most investors overestimate their ability to identify future compounders. The track record of the business may be too short. The competitive advantage may be uncertain. The market may be unproven.
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The 50/50 Rule exists for the middle case — the most common and the most honest: “I don’t know if this is a 100-bagger.”
If you knew with certainty, you wouldn’t need a rule. You’d either hold forever or sell completely. The rule is designed precisely for uncertainty.
The Mathematical Logic
Consider a $10,000 position that rises to $15,000 (+50%).
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The 50/50 Rule frees meaningful capital while maintaining meaningful exposure.
By harvesting 50% and rotating into a fresh position, you reset the asymmetry. You recycle capital from partially-consumed optionality into fresh optionality.
The capital you extract has already done part of its work. By redeploying it, you restart the asymmetric clock.
The Ergodic Dimension
There is a deeper logic at work.
A speculative position is non-ergodic. It can go to zero. Your experience over time may not converge to any average — because ruin is an absorbing state. Once you’re out, you’re out.
When you harvest 50%, you extract capital from a non-ergodic environment. Where it goes next is your choice — cash, an index, a compounder, or another speculative position with fresh asymmetry.
But in the moment of harvest, you have reduced your exposure to a single point of failure. The harvested capital can no longer be destroyed by the failure of that specific position.
This is the primary flow in any robust system: extracting wealth from fragile environments before they break.
The Connection to Skewness
Bessembinder’s research tells us that most stocks fail. A few succeed spectacularly. You cannot know in advance which category your speculative stock belongs to.
The 50/50 Rule is designed for this uncertainty:
If your stock is in the failing majority, you’ve harvested half at a gain before the decline.
If your stock is in the winning minority, you still own half for the ride.
You cannot optimize for both outcomes simultaneously. But you can position yourself to survive both.
The Discipline
The rule must be mechanical. No analysis at the moment of decision. No “let me see if it has more room to run.” No narrative adjustments.
Position hits +50%. Conviction is not high. You sell half. You redeploy.
The moment you start analyzing whether this particular gain is “different,” you have left systematic behavior and entered emotional rationalization. The purpose of a rule is to remove decision-making from the moment when decision-making is most compromised.
The Cascade (Optional)
If the remaining 50% continues to rise — say another 50% from your new cost basis — you can apply the rule again: sell half of the remaining position.
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You always keep exposure. It simply shrinks mechanically at each threshold.
When NOT to Apply the Rule
The 50/50 Rule is not universal. It applies only to speculative positions with uncertain conviction.
Do not apply it to:
Compounders. If you own a proven compounder with high conviction, let it compound. Selling half because it’s up 50% interrupts the very process you invested for.
High-conviction 100-baggers. If you genuinely believe you own a future 100-bagger, the coffee can approach is correct. Don’t touch it.
Index positions. Never harvest an index. Its structural ergodicity requires no intervention.
The rule is for the honest middle ground — the space between conviction and speculation.
Conclusion
The 50/50 Rule is not a trading strategy. It is a protocol for navigating uncertainty in a skewed world.
Bessembinder tells us most stocks fail. Shannon tells us volatility can be harvested. The law of diminishing returns tells us that asymmetry gets consumed.
The 50/50 Rule combines these insights: harvest the gain, recycle the asymmetry, keep the option, stay in the game.
It requires one honest admission: “I don’t know if this is a 100-bagger.”
If you don’t know, harvest half.
Half stays. Half recycles. The asymmetry resets.
The game continues.