Rule #1 Only Take on Asymmetric Risks
The Asymmetric Advisor focuses on speculating and investing in companies in the Resource Sector. The reason is because of the extreme boom and bust cycles, particularly the junior miners and exploratory companies. They are the riskiest, and as such, the most rewarding companies on the planet to invest in.
We generally don’t use leverage, that’s the quickest way to bust your account. Instead we find asymmetric bets where we can invest a small amount of money in a company that has tremendous upside potential. If we lose, it’s a small loss, we can handle it. But if the company realizes the potential of an opportunity we identify, then we can make a fortune.
Small downside, huge upside…that’s our focus…and quite frankly that’s what Asymmetric Advisor is all about.
Adding leverage just makes it possible to lose more than you have. So don’t do it. Just make intelligent, well-informed, and relatively small bets on companies that have huge upside potential.
Commodities go through boom and bust cycles. These are huge swings in price. Wait for these extreme swings to occur and buy into extreme weakness and sell into extreme strength. This takes a great deal of patience, but you’ll be rewarded for it.
This leads directly into the next rule.
Rule #2 Bet Small
This is without doubt the number one rule that traders and investors overlook. Trading too large. It usually starts with a good story from a guru. A can’t miss opportunity, from a friend, so the trader/investor goes all in, or commits too much of their portfolio in a speculative junior miner.
Let’s face reality, junior miners and exploratory companies are like startups, most of them fail. But you can increase your odds by doing your homework and invest only in companies led by people with top notch reputations and a credible list of accomplishments.
The name of the game is to stay in the game long enough so you can lay some bets down on a few big winners. The longer you’re in the game, the greater your odds are of striking gold, literally. The easiest way to stay in the game is to control your position sizing.
We do two things here, we speculate and we invest, one often leads into the other. When we speculate we never commit more than 5 percent of our capital. When we invest, never more than 10 percent of our capital. Anything higher than that and you’re limiting your time in the game, and like I said before, that’s your goal, to stay in the game.
Limiting your position size helps manage against a speculative worst case scenario. It also helps prevent you from being overweight in any one investment.
No one is so smart that they can pick the absolute bottoms or tops of a market, so we go even further, we place our bets in tranches. We actually divide the 5% in a speculative play or that 10% in an investment, and deploy our capital in tranches, or pieces. We spread the bet out trying to get near the bottom or top.
This also helps us gauge the quality of the bet…sometimes by the time we have committed a small first tranche, we might have to abandoned or postponed full commitment to the trade due to a market shock. Maybe we can get a better price and reduce our cost basis, or perhaps we get out of a dog without committing a full position.
This is smart money management.
Rule #3 Take Profits Often
If there was a universal truth with investing in natural resources, it would be opportunities are plentiful, and there’s no need to FOMO, the Fear Of Missing Out. There will always be another opportunity to profit.
But in order to take advantage of these opportunities, you need cash to invest in them, and if your capital is tied up, you won’t be able to.
So if we get a big move, we take some profits off the table, and let the rest ride. And conversely we cut our losers short, this is the essence of managing asymmetric bets.
There is no more powerful position to be in than to have cash to deploy when it needs to be deployed. Being nimble and unattached to your investments is perhaps the most powerful skills you need to develop. Never wait around hoping something will turn around.
This is why we look for asymmetric opportunities. When a trade or investment doesn’t work out, drop it, take a small loss. When it does work out, and achieves a substantial profit, take some off the table, at least enough to cover your original investment, book the profit, take the free ride with the remainder and get ready for the next opportunity.