Mike’s note: Jeff’s mantra in the Market Minute – and through his whole career – is to find trade setups where you risk a little to earn a lot. It’s the key to growing your account balance many times over.
Our colleague Tom Dyson, who just gave a presentation on his latest low-risk/high-reward idea, couldn’t agree more. He’s the editor of Postcards From the Fringe and a world traveling analyst and investor. In 2012, Tom made a bet on bitcoin that multiplied his initial investment 20 times over.
Read on below to see exactly how he did that… and how his strategy for “asymmetric bets” is the key to long-lasting wealth.
Have you ever played slot machines in a casino? Or video poker on a cruise ship?
They design these games so that you win frequently. And you can get addicted to them… because at every opportunity, you have a good chance to win. (Of course, you lose all your money eventually because these games are rigged against you.)
This way of “winning,” where you have more wins more frequently, is more compelling to the way our minds work. It holds our attention… which is exactly why the casinos use the strategy in the first place.
But if you really want to get rich, you have to do the opposite. And that’s what we call making an asymmetric bet.
Asymmetric betting is when you win infrequently. Most of the time, you lose a little bit of money… or nothing happens at all. It’s very boring, predictable, and dull.
And then occasionally, you score a massive outsized gain.
This gain changes everything.
All your losses are erased 100 times over.
Many of the ideas I put my own money into operate this way. I expect to lose a little bit of money here and there… and I do. But occasionally, I’ll make an enormous winner.
One example is an investment I made in early 2012 in bitcoin. It’s the now-famous digital “cryptocurrency” released in 2009.
At the time, no one in my network knew about this oddball investment. But I told a few of my colleagues about it…
The truth is, I could have never recommended bitcoin to Palm Beach Letter readers in 2012. It was far too obscure at the time… and far too small and speculative for a conservative investment newsletter.
But this was a true asymmetric trade.
It took me an entire weekend fiddling around with computer equipment and software, and trading bitcoins around to friends, before I made that bet.
I invested $25,000. And at one point, I held 3,330 bitcoins.
I walked away with $500,000 from that investment in just over a year.
And if I still held them today, my bitcoins would be worth over $30 million.
So there you have an example of what can happen when you score an asymmetric gain. Any losses I had incurred paled in comparison with the win.
How to Structure Your Asymmetric Bets
The way to do this in practice is to set up 10 trades altogether… realizing that nine of them are probably going to lose money.
So if you have $10,000 to speculate on asymmetric bets, take 10 positions of $1,000. Most will lose a few hundred dollars. But that 10th trade can make you $10,000 or $100,000 or more.
So you see, placing smart, asymmetric bets over the long run can boost your average win rate.
It’s certainly not as comforting at “winning” at slots with every other press of the button. But it will make you a lot more money in the end.
Editor, Postcards From the Fringe
P.S. Eagle-eyed readers will note I missed a huge, life-changing move in bitcoin. But I’m not begrudging it. Asymmetric bets like that are everywhere… you just have to know where to look.
In fact, I recently spotted a new asymmetric bet… and the gains from this bet could bring monumental change to your wealth – if you’re willing to make a massive trade that goes against the herd.
On Wednesday, I revealed the details of this trade to nearly 23,000 viewers. You can watch a replay here – but don’t wait. It won’t be online much longer.