Heads, I win big. Tails, I don't lose much.
4 min read

Heads, I win big. Tails, I don't lose much.

Heads, I win big. Tails, I don't lose much.

In 1983, Richard Branson, founder of the Virgin Group, was stuck on in Puerto Rico, on his way to the British Virgin Islands.

At the airport in San Juan, his flight was canceled because there weren’t enough passengers on the route.

This was the time before Richard Branson became a famous billionaire. Back in those days, Virgin was just starting off.

But Richard Branson didn’t just settle for a delayed flight. Instead, he chartered a full-blown passenger plane to share with the other stranded travelers.

To pay for it, he walked around the airport selling one-way tickets from Puerto Rico to the British Virgin Islands for $39.

He filled the plane.

When he returned from his vacation in the British Virgin Islands, Richard Branson decided to enter the airline industry.

He saw a massive need to improve a stagnant industry dominated by bad service. So he launched Virgin Atlantic with one goal in mind: make traveling fun.

Virgin Atlantic, which still exists today, was actually the first airline to install individual TVs in airplanes. Now, they are everywhere on long-haul flights.

But what’s most fascinating about this story is how he launched his airline. And it’s a classic example of an entrepreneur who thinks like an investor.

Richard Branson could have started Virgin Atlantic like most other airlines would have - by buying a plane and start operating it.

But that’s not what he did.

Instead, Richard Branson negotiated a short-term lease on a $200 million jumbo jet with Boeing, that would allow him to return the jet to Boeing if his airline didn’t take off (no pun intended).

So instead of sinking hundreds of millions of dollars into his new airline, Branson simply paid a short term lease with virtually zero downside.

If the airline didn’t work - he could just return the airplane.

In other words, Richard Branson started an airline with almost no downside but huge upside if it worked out (and it did).

This is a perfect example of asymmetric risk - looking for opportunities where the potential upside is disproportionately bigger than the potential downside.

Richard Branson did the first thing that every entrepreneur and investor should do when considering an opportunity or investment: protecting your downside.

Anytime you go into a new venture, it’s absolutely critical to always consider the downside risk first before you consider the upside.

Ask yourself: how much can you lose? What’s at stake if it doesn’t work?

Entrepreneurs and investors have a tendency to be overly optimistic about new opportunities, which leaves them vulnerable to huge downside they may not have thought about.

The truth is that a lot of new risky ventures or investments don’t pan out.

But we can put the odds on our side.

We do this is by looking for opportunities with asymmetric risk-reward, meaning they have big upside, but limited downside.

You can think about it like this:

Heads, I win. Tails, I don’t lose much.

In other words - if your venture or opportunity doesn’t work out, your downside needs to be minimal. But if it works out, your upside needs to be exponentially bigger than your potential loss.

That way, you can be wrong a lot of times - and still come out on top, because your winners will largely make up for your losers.

Understanding this concept is fundamental to being successful as an entrepreneur and investor.

Take Bitcoin for example.

Right now, one bitcoin is trading for around $8,000.

But Bitcoin is still relatively new and untested, and could potentially be displaced by something better.

That means there’s a chance it could go to 0.

So if you’re thinking of investing in bitcoin, you should be prepared to lose your entire investment - your $8,000 could go to 0.

But let’s have a look at the upside. If Bitcoin manages to establish itself as a reliable store of digital value, and even a global reserve asset, it could potentially come to rival gold in terms of market capitalization.

As of today, all the gold in the world is worth around $7 trillion.

And all the bitcoins in the world are worth about $145 billion.

In other words, if Bitcoin came even close to rivaling gold in the long-term, it could push its market capitalization up into several trillion dollars.

And if all the bitcoin in the world were worth, one day, even half of what all the gold in the world is worth today - it would imply a 20X upside to the price of bitcoin.

In that case, by buying bitcoin at $8,000, your downside would be $8,000 - but your upside could potentially be $152,000.

So the questions you need to ask yourself are these-- what are the odds that one bitcoin will trade for $160,000 in the future? And can you afford to risk $8,000 to potentially make $152,000?

Those are questions only you can answer. But if you think there's even a slight chance it could make it, and you had the money, buying bitcoin might be an attractive trade.

Whether you think it’s possible for bitcoin to reach this price - and what the odds are that is actually does - is entirely up to your own analysis. Everybody has a different opinion.

But if you think the price of bitcoin could never go beyond $10,000 - you’d be risking $8,000 to potentially make just $2,000.

In that case, buying bitcoin would be a pretty lousy trade.

Look - I’m not saying the price of bitcoin is going to $160,000, or stay at $10,000.

But what I am saying is that when you make an investment or chase a new venture, you always want to consider what you might lose, compared to what you main gain - and use your own judgment to bet on the highest reward possible relative to the risk you're taking.

Nothing else is worth it.

To freedom,

Alex

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