Asymmetry can work for you or it can work against you. For example, people spend extraordinary amounts of effort trying to lose weight. They set a goal, adopt a diet, and plug away at it for days, which turn to weeks. They are in a constant state of failure, until they reach that elusive goal. They wonder why they are not losing weight on their chocolate cake diet, they’ve followed the plan of limiting calories to 1200 a day, but no matter how hard they try, the weight just won’t come off.
One day they decide to talk to a nutritionist, and she points out that you are conditioning your body to fight against the lack of things it needs, so it responds with the opposite affect, retaining water and fat. She puts you on a lean and nutritious diet, consisting of a healthy array of foods and light exercise each day. With little effort you see big results, and fast. This is an asymmetric result, the first effort by the dieter working against the goal, the second resulting in a great change with much smaller effort, because it worked with your body, not against it.
Asymmetric investing is like that, it can work for you or against you, it all depends upon your strategy. Obviously you want an asymmetric strategy that works for you, allowing you to risk a small amount, and get back a much larger return than you risked.
The big difference here is that we look for asymmetric probabilities or an asymmetric distribution in the way we construct a trade. A great example is a call option, there is a defined risk, equal to the cost of the option, and there’s unlimited potential returns. No matter how low the price of the underlying asset goes represented by the options contract, you can never lose more than the cost of the contract. But the potential profit is unlimited. If the price kept going up, so would the value of the option, assuming that the option has not expired.
In the example above, the asymmetry is undefined because the profit potential is unlimited. In the real world profit is rarely if ever unlimited, but as long as it has significantly greater potential than the downside, then that is what we want. Typically, in trading or investing, we want to have a strategy the has a probability of 1 unit of risk to every 5 units of reward. Obviously a greater ratio of reward to risk is desirable, however the frequency of higher asymmetries typically get fewer and fewer as the ratio gets bigger. So, there’s always some happy medium we shoot for, something realistic and achievable.
Is Bitcoin an Asymmetric Bet?
Bitcoin has been an asymmetric bet for early adopters who invested $100 in 2011, hodled until the bubble burst at the end of 2017. And for believers, who think it’s the most amazing bet ever. Their argument is that if there’s even a 1% chance that it realizes the dreams of the Bitcoin faithful, it will become the asymmetric bet of asymmetric bets. According to Raoul Pal, a former hedge fund-centric executive at Goldman Sachs, said he believes that BTC is a perfect asymmetric bet, one of the best seen in decades.
But just because you believe your bet will shoot to the moon, does that make it so? If the odds are astronomical, or just one out of a hundred, I don’t think that makes it an asymmetric bet. The only thing I would characterize as asymmetric is if the odds of success are within the same realm of average odds, maybe with some leeway. But if you put it in the same class as a lottery ticket, then I’m sorry, you better look elsewhere.
Undoubtedly if you are a Bitcoin fan you have seen this long-term logarithmic chart of bitcoin, superimposed with halving events, then projected through the coming halving, which as of the time of this writing is only a few days away in May 2020 (the 3rd halving). This is not proof, just an interesting artifact. However, if it does come to pass, then I will admit that I am wrong.
The asymmetric strategy is how to take a small amount of money and turn it into a very large amount of money, how to take thousands and turn it into millions, even billions.
So, you would think with such a powerful strategy that everyone would be begging to know how to make 1000% or even 10,000% returns. Yet no one ever talks about it, and because no one talks about it, I guess the main stream investor thinks it’s a strategy only available to the super rich or super connected. This is absolutely wrong. Anyone can learn this strategy and its power to generate incredible wealth.
Most traders look for symmetry in their bets, or something close to it. 1 to 1 risk to reward, some go way out and look for 1 to 3 risk to reward. But virtually no one is looking for 1 to 25 or 100 risk to reward. Why?
Most Traders Don’t Get It
Despite the obvious nature of this simple concept, most people stick with symmetrical bets, or even worse, they are willing to take asymmetrical bets in the wrong direction. Can you believe that? It’s true, in fact it’s the vast majority of people doing this.
For example, an investor will buy a stock that some expert touts as having “100% upside,” and he’ll be willing to ride the stock to zero (a 100% loss) if things don’t work out.
- 100% upside.
- 100% downside.
- Perfect. Insane. Symmetry.
These people would be much better off going to the casino. At least there, they’ll have some fun, maybe get comped a dinner and a show. One thing is for certain, they have no business in the financial markets, yet they keep making the same mistakes.
How To Find Asymmetric Opportunities
Let’s face it, if you’re not pursuing strategies that are asymmetrical, then you are pursuing pain. It’s a bad bet, pure and simple.
So, how do you discover asymmetrical trades, where are they, how are they discovered?
In its simplest form, let’s say you find a stock that has 300% upside potential, and you decide that if you enter this trade that you’ll allow no more than a 25% loss. That is an asymmetrical bet.
- Upside of 300%.
- Downside of 25%.
- 12 to 1 odds.
Stocks with massive appreciation potential have asymmetric risk/reward profiles. This is in large part why we focus on junior miners and other natural resource sector opportunities.
Consider this, it costs very little to drill a few hundred cores in a tract of land, to discover a spot that could pull out a million ounces of gold, or to drill a $100k well and pull out $2 billion in oil. But it’s not only natural resources, it’s all commodities. These are the basic building blocks of all products that people consume. Their demand can be seasonal, affected by weather, natural conditions and supply and demand. They go through great boom and bust cycles, creating something called extreme cyclicality.
Just look at some of the basic commodities like copper, natural gas, or silver…any of these can go from decade lows to sky rocket 125% in a few months if the forces of demand come into play. It happens all the time.
The key is to buy these stocks after busts and sell them before the boom. And while the volatility might seem like a no-go for you, then your idea of position sizing is way off. We are about making small bets for big wins. We would never commit more than 5% of our capital to any single trade.
Even 5% might be too much for some accounts. The idea is that you want to make a lot of small trades, knowing that not every one will explode, but also knowing that some will. And when they do, it will more than make up for the small losses. This is how you create life-changing wealth.