Asymmetric Upside: Investing Like a Pro

asymmetric investing

Don’t make money slowly. If you spot the right opportunities, you can get outsize returns. Asymmetric upside is when you risk $1 to earn $5 or $10. That’s 500% or 1000% returns. They won’t teach you this on Dave Ramsey’s blog.

You’re at a carnival and come across a new game. “Pick the right door and double your wager!” There are 10 doors and you have to pick one. You plop down $100. Is this a wise move?

Assuming you play this game X number of times and the winning door changes each game, eventually you’ll win, but most of the time you’ll lose.

You decide to keep walking. A few carnies later, you see another game – “Double your money unless you pick the wrong door!” This one is inverted. You have 10 doors to choose from, and they all win except for one.

If you play this game X number of times and bet the same amount each time (e.g. you’re not betting all the cash you have every single play) then you will consistently profit over time.

The first game is a gamble with the odds set against you.

The second game is a strategy where you are statistically geared to profit over time. AKA get yourself some asymmetric upside.

Which of these games do you want to play?

How Normal People Invest

Normal people try and pick a company or fund they think will do well over time, and whose share price will reflect that growth or resiliency. They believe a 10% YoY increase is solid. Sure.

That’s not bad. It’s still beating the market. And finding creative ways to make money when your stocks are flat is important.

One on hand, it is. Historical returns of the S&P500 are around 8.5% annually. So if you beat that return each year, you’re beating most fund managers. You are stewarding your savings well—but this path won’t make you rich for at least a few decades.

Top Fund Managers Look for Asymmetric Upside

Simple words, difficult task.

Asymmetric upside means for every dollar you invest, you expect to gain 2, 5, 10 more dollars. This is inverted from the typical target of getting 10¢ from every dollar annually.

If you are investing $10,000, having $11,000 by the end of the year is nothing to be ashamed at. But it won’t change your life. However, turning that 10k into 100k in one year’s time definitely can change your life. That’s paying off your debt, seed capital for a business, or the cash needed for a grad program.

How do they get these returns?

The Risky Way

Options. This is the fastest way to lose money, especially if you don’t know what you’re doing. If share price drops 10%, your shares have only dropped 10% in value—but your option’s value may drop 90%.

The potential upside is huge, which is why people still do it. In terms of number of options, I would bet most of them have lost me money. But for the few that paid out, they more than paid for all the rest.

I’m getting better over time at wisely using options (including selling covered calls on shares I’m not afraid to lose to generate income) but it’s still probably not what you want to do unless you’re extremely confident in your prospect and can handle the risk of losing 100% of your premium, which is certainly possible.

The Slightly Wiser Way

This one is harder because you’ll be using shares. If you long the right call option at a low enough premium, a stock rise of 10% can give you a 400% return on what you invested (as it did for me last week). Meanwhile, to get a 400% return on shares, the shares themselves would have to rise 400%.

This is a slower game—but you’re not risking your premium in the process.

When someone doesn’t have money, they’re willing to take greater risks. That’s why the world is full of stories of startups putting it all on the line to make their business work. They’re not really risking much other than time and reputation. Meanwhile, it’s extremely rare for someone who has already gotten wealthy once to put it all on the line one or even two more times. That’s why Musk is (was?) the richest person in the world. He made his fortune on PayPal, doubled down into SpaceX, and doubled down again into Tesla.

Typically, once someone becomes wealthy, their game is about preserving wealth by growing it slowly, not aggressively seeking another outsize opportunity.

How Is Asymmetric Upside Practically Achieved?

There are 100s of ways I’m sure, the vast majority of which I don’t know. The best ones are the ones not everyone knows about, which is what makes them asymmetrical.

Here are some possible routes to staking an asymmetric investment:

  • Doing deep research into a specific industry (e.g. rare earth minerals) and investing into speculative ventures set to disrupt it (e.g. Japanese sea floor rare earth mineral mining)
  • If a stock has had a sharp drop recently, but the core business hasn’t changed, then often you can expect a reversion to the mean. This is one way to pick up “safe” returns. I invested in DCP last year which had experienced a sharp drop against its historical price at the start of the pandemic as tons of energy stocks took a hit
  • Comparing valuations of parallel businesses. For example, at time of writing (May 31) GameStop closed last Friday at $220. I personally believe the stock is worth $570/share on fundamentals alone. When evaluated against Chewy (the pet e-commerce biz) which has similar gross profit margin relative to its revenue, GameStop should be trading at $1142/share. I’m comparing these two businesses (pet supply and gaming) because the founder of Chewy is now leading the change at GameStop from a board seat.

    However, being conservative since not all of GameStop will transition its business to ecom, I cut that estimation in half, landing around $571. But I like round numbers, so $570. All of this is completely independent to the “short squeeze” crazy activity the past few months which is far from over. Maybe the stock really will go to the moon (I think so), but it feels like the biggest asymmetric opportunity out there since my personal valuation for it is more than double its current share price.

Real World Ideas for Asymmetric Upside

  • Buying entire blocks of real estate instead of one unit. Say you live in a city where one or more neighborhoods are getting rebuilt/gentrified/whatever. Maybe someone wants to buy a unit there to flip and rent out to yuppies desperate to look cool. But YOU are sitting on serious cash and can strike major deals with lenders and city officials for tax cuts or even subsidies. You buy up one whole block.

    Now you’ve gotten the buildings at a discount (in bulk) and you can remake the entire strip in your image. Is it going to be the main drag of bars and restaurants? Or maybe a series of boutique shops where the bougie go and flex? You don’t have to worry about someone building a trashy hooka bar next to your custom suit-tailoring shop when you get to decide which tenets are even on the entire street. You decide that street’s entire character.
  • Digital products. It costs nothing but time to create a digital product. You can spend money on marketing, but you want your marketing to yield way more than your spend. E.g. for every $1 you spend, it should bring in $4 of revenue. That’s assymetric. Spending $1 for $1.10 in revenue is just not worth it, especially at small dollar amounts.

There is No Shortage of Opportunity

There are 100s—probably 1000s—of more ideas. Obviously, these approaches all have different styles and price points. I’m not too interested at this point in my life at being a real estate guy (which would be a multi-year commitment to a single city), but maybe you are. Maybe you have relationships with city officials you can leverage. Or maybe you’re super into arboreal culture and understand mahogany trees are going to struggle to grow next year, so you buy mahogany futures for next year.

The best investments are the ones you understand better than anyone else. Let the rest of the world catch up to your knowledge while you capture asymmetric upside.

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