The Six Most Important Words in Investing

The Six Most Important Words in Investing

Justin’s note: Today, I’m handing over the reins to RiskHedge CIO Chris Wood, who shares the one key mindset that all great investors share, without exception.

With this mindset, you can shoot for 20-1, 50-1, even 100-1 on your money without taking on big risk. All you need to do is apply these six simple words…

The Six Most Important Words in Investing

By Chris Wood, editor, Project 5X

There are lots of different ways to get rich in markets.

Super-investor Warren Buffett made his fortune buying stock in great businesses and holding for decades. Billionaire trader Paul Tudor Jones was known for swooping in and out of stocks, often holding for only minutes.

Two polar opposite approaches… Two multi-billion dollar fortunes.

What could these wildly different strategies possibly have in common?

  • They both exploit the single most important concept in investing…

Risk a little. Make a lot.

I can’t overstress how important these six words are. Grasp this concept and doors will open for you to make life-changing gains. Overlook it and you’ll tread water at best, struggling to beat the market averages.

You’ve probably come across the concept of “risk-reward” in investing. Risk-reward forces you to ask: How much do I stand to make compared to how much I can lose?

Say you’re considering a trade. If it goes right, you’ll make $5,000. If it goes wrong, you’ll lose $5,000. I call this a “symmetrical” trade… and I wouldn’t touch it. It has a risk-reward ratio of 1:1.

You stand to lose as much as you stand to make. Which is awful. You might as well go play blackjack at the casino. Symmetrical trades are a sucker bet.

You see in most areas of life, symmetry is an ideal to shoot for. Scientists agree symmetrical faces are generally more attractive. Architects and interior designers will get fired for not respecting symmetry.

But in the financial markets, it’s the opposite...

  • In investing, symmetry is your enemy.

When evaluating a trade or investment, the less symmetrical, the better. Most successful, disciplined traders shoot for a minimum risk-reward ratio of 3-1 or 4-1. You risk $5,000 and you stand to make $15,000 or $20,000.

This is solid asymmetry. But as disruption investors, we can do a whole lot better. Because buying the right disruptive stocks is the ultimate asymmetric bet.

Let me show you exactly what I mean. As you may know, I recommend microcaps in my Project 5X advisory with the potential to climb a minimum of 500%. If you apply, let’s say, a 50% stop loss, you get 500% minimum upside… Combined with 50% maximum downside.

That calculates to a risk-reward ratio of 10-1. That level of lopsidedness should get you very, very interested.

The right microcaps can hand us the chance to earn 20-1, 50-1, or even 100-1 on our money.

  • I realize numbers this large can sound hard to believe or “too good to be true.”

I assure you gains that big are available to us, right now, in truly disruptive stocks.

Here are five quick examples of the huge gains that “yesterday’s” disruptive businesses achieved:

✔ Cisco Systems (CSCO)…+101,538%

✔ Microsoft (MSFT)…+113,900%

✔ Adobe Systems (ADBE)…+130,376%

✔ Apple (AAPL)…+112,400%.

✔ Qualcomm (QCOM)…+20,230%

Even a relatively small stake of $5,000 would’ve ballooned into well over a million bucks in any of these five stocks.

Now please understand, these gains don’t happen overnight. Although the examples I’ve listed are household names today, they were virtually unheard of when they IPO’d in the ‘80s and ‘90s.

Like a sapling growing into a strong oak tree, it took years for them to grow into dominant disruptors that transformed whole industries. On average, it took these five companies 25 to 30 years to achieve their 100 to 1 gains.

  • My key point is, most novice investors will never see anything close to these gains.

Why?

Because they repeatedly risk $5,000 for a chance to make $5,000. They overlook the power of asymmetry.

Is it any wonder why many folks struggle to make any real money in the markets? At Project 5X, we hunt for opportunities to risk $5,000 for a shot at $1,000,000 in profits. The risk-reward ratio on that? 200-1.

Beautifully asymmetrical. You might rightfully wonder—how rare are big gains of, say, 10 to 1 or better?

Markets are more fertile with these opportunities today than ever before. But I can tell you that, since 2009, around 50 stocks in the S&P 500 have achieved gains of 1,000% or better.

So 10-1 profits aren’t as rare as one might think.

At Project 5X, we hunt for these big gains… We keep losses small… So the power of asymmetry is always on our side.

Risk a little. Make a lot.

Commit these six words to memory. They’re the most important words in investing.

And the source of our great edge as microcap investors.

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Chris Wood, editor, Project 5X

P.S. Right now, my favorite “asymmetric bet” involves a microcap that’s breathing new life into Moore’s Law and, in turn, keeping the future of tech alive. In short, it’s creating an entirely new way to make microchips. This is the perfect play to “risk a little” to “make a lot.” You can access my full writeup on this opportunity here.