Why Your Hit Rate Doesn't Matter (And What Actually Does)
The maths behind the world's best investors prove that being right isn't the game. Being right big is.
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Most investors are obsessed with the wrong question.
They want to know: how often are you right?
It sounds logical. If you pick more winners than losers, you should make money. If your hit rate is high enough, the returns will follow.
Except that’s not what the data shows. Not even close.
I’ve been reading Stock Market Maestros by Lee Freeman-Shor and Clare Flynn Levy, which builds on the research from Freeman-Shor’s earlier work The Art of Execution. The findings are striking, and they reinforce something I’ve come to believe sits at the very core of successful investing.
The average hit rate of the eleven elite investors profiled in the book is 51.5%.
Let that sink in. These are some of the best investors in the world. They are right roughly half the time.
The range runs from 43% to 57%. Some of the top performers in the study were wrong more often than they were right.
And yet they all made money. Significant money.
So if being right half the time is enough to generate exceptional returns, what’s actually doing the work?
The Metric That Matters: Payoff Ratio
The answer is something called the payoff ratio.
It measures how much an investor gains when they’re right relative to how much they lose when they’re wrong. A payoff ratio of 100% means your winners and losers are the same size - you break even before considering hit rate. Anything above 100% means your winners are larger than your losers.
The average payoff ratio across the eleven maestros in the book is 202.5%.
That means when these investors are right, they make roughly twice as much as they lose when they’re wrong. The range is 128% to 288%.
This is the engine. Not stock selection. Not hit rate. The size of the wins relative to the losses.
Think about what that means in practice.
An investor with a 50% hit rate and a 200% payoff ratio makes money - consistently.
An investor with a 70% hit rate and a 50% payoff ratio - right seven times out of ten, but cutting winners early and letting losers run - can still lose money.
The hit rate feels like the important number. The payoff ratio is the one that actually determines outcomes.
Why This Is Really About Asymmetry
This is where the concept connects to something broader.
At Schwar Capital, asymmetry is the lens through which we look at everything.
Every position starts with the question: what’s the downside relative to the upside? If we’re risking £1 for a shot at £5, and we believe the probability favours us, that’s an asymmetric setup.
The payoff ratio is just the portfolio-level expression of the same idea.
When Freeman-Shor studied 1,866 investments across 30,784 trades made by 45 fund managers, what he found was that the behaviour after the buy - how investors managed both winners and losers - was the primary driver of returns.
Not the quality of the initial idea.
Not the analytical framework.
The execution.
The investors who made the most money did two things well. They cut losers relatively quickly, limiting the damage from being wrong. And they let winners run, allowing the right ideas to compound far beyond the initial thesis.
The investors who struggled did the opposite.
They held losers hoping for recovery and sold winners too early to lock in a gain.
That pattern - cutting flowers and watering weeds - is devastatingly common, and it destroys payoff ratios even when the underlying stock picking is sound.
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Asymmetry Beyond Individual Stocks
Here’s what I think gets missed in most discussions about asymmetry: it’s not just a stock-level concept. It applies to the entire way you construct and manage a portfolio.
Position sizing is an asymmetry decision. When you put 15% of your portfolio into your highest-conviction idea and 3% into a speculative position, you’re engineering asymmetry at the portfolio level. If your 15% position doubles, it moves the needle. If your 3% position goes to zero, it’s a rounding error. That’s asymmetry by design.
When you add to winners, you’re compounding asymmetry. Most investors do the opposite - they average down into losers because the price looks cheaper. But adding to a position that’s working, where the thesis is playing out and the business is executing, increases your exposure to something that’s already proving you right. That’s how payoff ratios get above 200%.
Time horizon is an asymmetry lever. The market’s obsession with the next quarter creates a structural advantage for anyone willing to wait. A business that will compound earnings at 20% for a decade but is going through a rough six months is being handed to you at a discount by people who can’t afford to hold it. Your willingness to sit through that is an asymmetric edge.
Even portfolio concentration is an asymmetry choice. Owning 8-12 stocks instead of 50 means your winners have room to genuinely impact your returns. A 5x return on a 10% position transforms your portfolio. A 5x return on a 0.5% position barely registers. The willingness to concentrate is the willingness to let asymmetry work.
The Uncomfortable Truth
The practical implication of all this is that being a good investor feels terrible in real time.
If your hit rate is 50%, you are watching half your positions lose money. That’s not a bug in the system. It’s the system working as designed.
The natural human response to a losing position is to hold on and wait for it to recover.
The natural response to a winning position is to sell it before the gain disappears.
Both instincts feel rational in the moment.
Both destroy your payoff ratio.
Freeman-Shor’s data makes this uncomfortably clear. The difference between good and great investors isn’t the quality of their ideas. It’s the discipline to act against instinct - to cut what isn’t working and let what is working continue to compound.
This is why I’ve written before about the importance of selling based on thesis, not price.
A stock dropping 30% because the market is having a bad week is not the same as a stock dropping 30% because the business model is broken.
One is an opportunity. The other is information.
Being able to tell the difference - and act accordingly - is what builds asymmetric payoff ratios over time.
How I Think About This in Practice
I’ll be transparent about how this shapes the Schwar Capital portfolio.
When I take a position, I’m already thinking about the payoff structure.
What’s the realistic downside if I’m wrong?
What’s the upside if the thesis plays out?
And - this is the part most people skip - how big could this become if it exceeds expectations?
I want positions where the base case already justifies the investment, but where there are credible scenarios for the business to significantly outperform.
That’s how you build in optionality that can drive a payoff ratio above 200%.
On the loss side, I try to be honest with myself about when a thesis has broken versus when a stock is simply cheap. If the business fundamentals have deteriorated in a way I didn’t anticipate, I’d rather take a 20% loss and redeploy that capital into a better asymmetric setup than hold on hoping to get back to even.
Getting back to even is not an investment strategy. It’s an emotional coping mechanism.
The hardest part is the winners.
When a position doubles, every instinct tells you to take profits. The gain is real, it’s sitting right there, and the fear of giving it back is powerful.
But the data is unambiguous:
The investors with the highest payoff ratios are the ones who can sit through that discomfort and let their best ideas continue to compound.
That doesn’t mean hold forever blindly. It means hold as long as the thesis is intact and the business is executing. The sell trigger should be fundamental, not emotional.
The Takeaway
If you remember one thing from this post, make it this:
Investment success is not about being right most of the time. It’s about making more when you’re right than you lose when you’re wrong.
That’s the payoff ratio. And it’s driven by how you handle both sides of the ledger - your losers and your winners.
The best investors in the world are right about half the time.
What separates them is that their winners are two to three times the size of their losers. They achieve this through discipline: cutting losses when the thesis breaks and letting winners compound when the thesis is working.
That’s asymmetry applied to portfolio management.
And it’s the same principle that governs how we think about individual stock selection, position sizing, concentration, and time horizon at Schwar Capital.
The game isn’t about finding more winners. It’s about making your winners count.
Thanks for reading.
Dom
Schwar Capital
Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions. You can see our full disclaimer here.
Easier said than done. So many stocks perform well on operative side and the stock also moves higher, but sometimes they crash back below buy in. E.g. holding NOW and TGLS for years. But all profit is gone...