How Buffett uses these “lopsided bets” to make billions…
Worried about market volatility? Don’t be.
Just start making “lopsided bets” like Warren Buffett.
The super investor’s recent acquisition of a huge stake in Apple (NASDAQ: AAPL) demonstrates how you can use these bets to use risk to your advantage.
Buffett once said:
“Risk comes from not knowing what you’re doing.”
The financial press loves to quote Buffett, and why not? He’s worth $67 billion, so he must know what he’s doing.
Buffett seemed to know what he was doing, when Berkshire Hathaway (NYSE: BRK.A) announced that it had purchased more than 9.8 million shares of Apple in the first quarter, marking Berkshire’s first investment in the consumer icon.
Berkshire acquired its position at an average price of $109 a share, for about $1.1 billion. But soon afterwards in late May, Apple’s stock price fell to the $90 level, sending Berkshire’s stake in Apple plummeting to $888 million.
Apple fell as low as 14% this year, making it one of the worst-performing stocks in the Dow. It suddenly became fashionable among the chattering class on cable TV to portray Apple as a technological “has been” with its best days behind it.
Had the Oracle of Omaha lost his touch…or perhaps his mind?
Fast forward to mid-June. As of this writing, Apple shares hover at $100 and they’re up 6.63% year to date, as investors start to realize that the Cupertino giant still has plenty of engineering and marketing mojo left. The sentiment now is that Wall Street had overreacted to one weak earnings quarter.
What did Buffett know that the rest of the investment herd didn’t?
Let’s look at one of Buffett’s key tactics for handling today’s investment climate — a climate that’s fraught with a multitude of risks both at home and overseas. Whether the market is moving up, down, or sideways, this method allows you to double, triple or even quadruple your money, without shouldering undue risk.
Buffett is famous for being a value investor, whereby he pinpoints stocks that trade for less than their intrinsic values.
But he also uses another method that you’ve probably never heard of — “asymmetric investing.”
Many of the world’s smartest investors apply this concept and it’s a major factor in how they got so rich. If you want to make serious money, you should understand how it works and leverage it for your own gains.
Buffett’s Berkshire Hathaway is one of the world’s greatest success stories, but it hasn’t racked up returns in a linear fashion. Buffett is 85 years old and he’s seen his share of rallies and crashes, crises and panics, and booms and busts. Through it all, asymmetric investing allows him to balance risk — and as we’ve recently seen, spot a “bottom” in great stocks like Apple.
Asymmetric investing is a strategy whereby the outcome of a trade probably has more profit than loss or risk taken. The upside potential may be greater than the downside loss, or the downside is limited but the upside is unlimited.
“Asymmetric” is the absence of symmetry.
As applied to investing, it means the risks versus the rewards are imbalanced. An asymmetric portfolio entails fewer scenarios where the investment has the potential to lose money and, if it does lose money, the amount lost is limited.
This method preserves capital and offers downside protection. There are more scenarios where the investment has the potential to profit, and when it does the profits are significant.
How does this method differ from conventional investing? Like most investors, you probably weigh risks and returns in a way that’s more directly correlated.
For example, you already know that a small technology stock has more risk than, say, a large-cap tech, but the upside potential is greater. The large-cap stock has more upside potential than a stock mutual fund, but the individual equity confers higher risks. A stock mutual fund has more upside potential than bonds, but the risks are higher…and so on.
It’s a familiar “weighing scale” and it’s fine for investors who are content with making relatively modest gains over the long haul. But it’s no way to become wealthy.
The Math Doesn’t Lie
Consider the math underlying asymmetric investing. Stocks can only go down 100%, but their upside is unlimited.
Sounds simple, doesn’t it? Problem is, most investors either don’t use the asymmetric method or they’re unaware of it. They tend to invest their money with tunnel vision, concerned only with avoiding risk and trying to bet on “sure things.”
But many of the investment world’s top money managers embrace asymmetric investing. They usually don’t use the term, but it’s how they became billionaires. Sure, sometimes they make a losing bet, but over time an asymmetric approach will hit pay dirt for outsized gains that trounce the market.
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