Investing May Be Simple Than It Seems

Investing May Be Simple Than It Seems
January 07 21:45 2019

As I fly across the atlantic 38,000 feet in the air with no internet I find myself left to my own devices to create content.

Normally one can research a topic, reference their prior works or analyze a price chart.

This is sort of good though.  There is a quote, I believe it was Benjamin Franklin, but don’t quote me on that and the general idea of it is that man is never more resourceful when left to his own device.

I feeling that a bit now as I am disconnected and don’t have the laptop with me that has all my files.  It feels a bit good after getting past the initial “my brain can’t think of anything” moment.

Why Don’t We Just Look at Investments as a Pure Risk-Reward Equation?

Seriously though – that is the question that popped into my head while thinking. Risk-reward is something I preach on my radio show and in my investment analyses and it really is a great tool to use as a pass/fail on whether to invest in something or not.

Don’t get me wrong, it is easier said than done.  Twenty years into investing and I still have emotions and other thoughts factor into my decisions.

Risk-Reward is so simple and successful

I’m rather confident in that statement above.   It’s not just because some of the most successful investors of our time live by it.  However, the fact that Paul Tutor Jones, one of the best investors of the past few decades, basically only invests in things that offer 5 to 1 risk-reward on this money is worth taking note of.

I believe in it just from my own experiences.  When I have the patience to only wait for homeruns as I like to call them; my hit rate skyrockets.

Problem is those opportunities only come around here and there, which means weeks without a trace for an active trader.

Trading or even active investing calls for us to be, well, active.  Is this need to be active just us giving up our edge?

Maybe to an extent, but a strategy that works is more important.  If you did wait for only the best risk-reward scenarios in that strategy though your hit rate would likely increase immensely too.

Better for Investors?

If someone is just a long-term investor would it not make sense to just be patient and wait for those 5 to 1 risk-reward scenarios and only invest then?

We get plenty of opportunity In that regard, though it may not seem like it.

Try this scenario on for size.  You see an asset vastly appreciate, you wish you would have bought some but you didn’t.  So you sit and watch and say I wish I would have.

Then not many months later that same asset capitulates and crazy profit taking commences and the short sellers go to town knocking the price of that asset well below the price you wished you had bought.

At this point, the asset represents slightly better than a 5 to 1 risk-reward proposition if you believe it will at some point test its prior high price.

Is this a no brainer or not?

Based on that scenario this would make for a great long-term investment proposition, right?

Then are the majority of people afraid to invest in it?

At this point many of you have figured out I’m talking about Bitcoin.

It’s not actually about bitcoin specifically though.  It’s about the risk-reward proposition it offers and is what we should look for in any investment.

Be wrong and make money

This is what is so great about this approach.  The ability to be wrong several times and still make money.

Think about it – if you got into five different investments with the same scenario as bitcoin and only got two right, would you not still make money?

You’d actually do quite well!

Anyway, just some food for thought.  Now I just need to post this when I finally touch down!

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