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Asymmetric vs.
Traditional Investing

 

Many have a general understanding of traditional investing because of media coverage and the industry created around retail investing (stocks, bonds, mutual funds, etc.). However, asymmetric investing is a term many don't know. Asymmetric means lacking or the absence of symmetry. In the case of asymmetric investing, it means the risks vs. the rewards are imbalanced.

 

For example, which of the following hypothetical investments would you rather make?

 
Investment A   Investment B
  • 25% chance of losing half of investment
  • 25% chance of doubling investment
  • Investment range: 50% loss to 100% return
 
  • 10% chance of losing a tenth of investment
  • 30% chance of doubling investment
  • Investment range: 10% loss to 100% return
 

If you chose the second, you think like an asymmetric investor. If you chose the first, the gain or loss may be due to the overall market and you likely over paid to access that risk / reward profile.

 

At its most simplistic level, asymmetric investing means a return profile with higher and larger positive return outcomes while also having lower and fewer negative returns.

 

This is achieved by identifying and selecting opportunities that meet criteria like the following:

  • Fewer scenarios where the investment has the potential to lose money and – if it does – the amount lost is contained.
  • More scenarios where the investment has the potential to gain money and – when it does – the amount gained is significant.

 

 

This contrasts dramatically with traditional investing where returns and risks are more directly correlated. For example, an individual stock has more upside potential than a mutual fund of stocks but the risks are significantly higher too. A mutual fund of stocks has more upside potential than bonds but the risks are higher and so on. Unfortunately, many don't understand the underlying risks and costs associated with these retail investments.

 

Finding asymmetric investments requires vetting individual opportunities – not selecting funds or broad sector vehicles – that meet our asymmetric criteria. These opportunities tend to exist in parts of the broader capital markets that retail investors typically do not access.