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 $4 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.
Founder, Palm Beach Research Group
P.S. My colleague, Palm Beach Confidential editor Teeka Tiwari, has spent the last year diving deep into the cryptocurrency markets. He’s traveled all over the world and met with the leading cryptocurrency experts to learn about the most profitable plays the sector has to offer. And now, he’s hosting a special training series to share what he’s learned.
On April 17, Teeka’s free cryptocurrency training series starts. He’ll show readers how to get in on these once-in-a-lifetime opportunities. Get more information on what you’ll learn by clicking here.
As of right now, the stock market doesn’t have any pure plays on cryptocurrencies or their underlying technology—the blockchain.
However, one of the first publicly traded companies to embrace blockchain technology was IBM.
In late 2016, IBM announced a new service called Hyperledger Fabric v1.0, a suite of tools that enable businesses to operate their own secure blockchains.
Having easy access to these tools is vital for the growth of crypto-based startups. As a result, monetizing blockchain technology has helped drive IBM’s stock price higher.
Keep an eye on other corporations that embrace blockchain technology such as Microsoft, Intel, and JPMorgan. As this technology takes hold, its success should reflect in their stock prices.
Bitcoin’s Growing Reach: A study by the Cambridge Centre for Alternative Finance has found that the total number of Bitcoin wallets has increased fourfold in just the past five years. It also found that the number of unique active users of cryptocurrency wallets has increased an estimated fivefold over the same timeframe. Yet further evidence that bitcoin is fast approaching its mass adoption point (MAP).
News You Can Use: Editorials about the economy and markets are proving more prescient than consumer sentiment surveys. That’s according to researchers Adam Shapiro and Daniel Wilson from the Federal Reserve Bank of San Francisco, who have created a new method of determining sentiment through textual analysis. This may signal that financial reporting is a stronger measure of future market action than traditional sentiment indexes.
Berkshire’s United Problem: In the wake of the widely publicized video of a passenger being dragged off a United Airlines (UAL) plane, no investor is likely hurting more than Warren Buffett. With his Berkshire Hathaway being far and away UAL’s largest shareholder and the stock slipping 1.1% on Tuesday following the bad press, Buffett is estimated to be losing around $23.5 million if his position remained unchanged.