If you research into how wealthy individuals get to where they are you’ll most likely find that they have made some “asymmetric bets” in their lifetime. These asymmetric bets could have been investments and/or starting their own businesses. A series of successful asymmetric bets can compound into an incredibly large return.
In this post, I’ll be going over the idea behind asymmetry as this is a concept rarely talked about.
Disclaimer: None of what I’m talking about should be considered as financial advice. It is for entertainment and educational purpose only.
What Is Asymmetry
You probably know what symmetry is. It is when parts of something have equal size and/or form. Asymmetry is the opposite, it is when the parts are not the same.
In the context of investment, this would mean the risk and reward are not equal. For example, the risk is 100%, while the return is over 1000%. This would be an asymmetric bet and when using correctly it would give you fantastic returns with minimal downside.
Asymmetry Can Yield Massive Upside
When you make an asymmetric bet the upside is significantly higher than the potential downside. Let’s consider two situations: an asymmetric bet and a symmetric bet. For an asymmetric bet, you’re risking $1000 for a chance to grow it into $10000 or lose it all. As a symmetric bet, you’re risking $1000 for a chance to grow it into $2000 or lose it all.
Given the options, which one would you choose? I’m sure many would opt for the asymmetric return. However, in practice, many people cannot see asymmetry and, as a result, pick symmetric return investments. The odds for symmetric bets are definitely not in your favor in the long run. You don’t want one setback to put you further back than where you first started.
To help visualize the difference between symmetric return and asymmetric return over time, let’s consider a simple example. For the symmetric return, each successful investment is 100% return and failure is 50% loss. For the asymmetric return, each successful investment is 1000% return and failure is 50% loss.
Notice a difference between the two? The asymmetric return after 4 investments with the 2nd one being a failure end up with far more than the symmetric return.
Where to Find Asymmetric Bets
Asymmetric returns are possible in almost any industry. Some key characteristics to look for are volatility and disruption. Innovative companies that are building a product that is far superior, different, and cheaper than the competition will disrupt their industry. The earlier stage in the adoption curve the greater the risk, but also the reward.
adoption curve
For example, the return might be 100x with a risk of losing 100% if you invest during the innovators/early adopter stage. There is a high chance of losing all your capital because you don’t know if anyone would adopt the new technology. While if you invest between the early adopters and early majority stage, the return might be 10x but the risk is significantly lower because more people are adopting it. It can still fail, but the company has proven there is a market, which means a total failure is unlikely.
Most asymmetric opportunities are a bet and not an investment. Like with any bet, you don’t want to put all your capital at risk. So, it is important to apply risk management and keep your asymmetric bets small relative to your portfolio with up to 5% at most. This is enough that when you win you still win big, but when you lose it doesn’t hurt you much either. The key to using asymmetric bets to grow your portfolio is to find the right balance where a win is substantial and a loss is insignificant.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
If you’re new to investing and need a guideline to help you start your investment journey you can check out my post on setting yourself up for financial success. I also have a post about beginner mistakes to avoid in the stock market.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.