When I was in the Wharton School of Finance (over 60 years ago), a topic that came up was the “risk-reward ratio.” This common idea was and still taught is that if one took a big risk of leveraging & losing all their money, they could either A) lose it all or B) have a very big return — if the investment turned out well.
On the other hand, if one invested in the most safe, non-risky conservative things —like high quality sovereign government bonds, they would have a dependable but definite smaller gain at the end of the day.
At the time, 1956, I was a big-mouthed contrarian kid. I liked to show how original and smart I was. Thus, I commented in class to the eminent professor that his theory was all wrong.
“Why?” he asked.
Because there is no God in the sky who decides what is risky and what is not risky. Not only that, IMO the “general consensus” & all the TV investment gurus were usually wrong.
IMO — In my opinion, then and now, something generally considered risky could give a super high return very dependably –only if one understands that the risk is not as serious as generally perceived.
Example: People in 2018 say real estate in Detroit is risky. But I’d say if you buy in a good area, acquiring distress property at half of market value, it is a sure thing—not risky at all.
Theoretically “super safe” investments could deliver a 100% loss.
My big-mouth attitude was imprudent. I got into trouble many times for questioning conventional wisdom. But was I right or wrong? Let’s look at a few examples:
When Jackie Kennedy, widow of the USA president got a huge divorce settlement from her 2nd husband, she invested most of it in “safe” New York State Muni Bonds. They had a great tax free yield. 9% I think…. For years they were considered risk-free. Then NY defaulted on the bonds and poor Jackie was nearly broke. The same thing happened years later with Argentine Sovereign Bonds. They were considered safe & risk free by the investment community. But they also defaulted. The rating agencies–Moody’s, Dow Jones, A. M. Best, etc. are often very stupid and very wrong. That is because they are paid by the companies whom they rate to rate them. All too often, the more they get paid, the higher the rating. Of course sometimes the AAA ratings they give are in La La Land –totally wrong & unrelated to the real risks involved. That happened with the high ratings given to sub-prime loan packages in 2007-2008.
O.K. I always felt that if you knew what you were doing, risky stuff could safely yield the best returns. Being highly leveraged (in other words, borrowing huge amounts, like more than 100%) to do deals is considered risky. But I personally didn’t consider it risky at all when I bought property in a real estate market that was rising 3% a month–for good reasons of supply and demand. Especially since in that particular market at that particular time (California) there was essentially, no personal liability on mortgage loans. Thus if your deal with 100% borrowed money didn’t work out, you could just walk away. If values went up & you did not walk away you would gain infinity. What’s that?
For instance, after holding a million-dollar property with a 110% loan against it for a year. What was the risk? You might be looking at a $360,000 gain on ZERO investment. As it turned out, this kind of “high-risk investment” brought me and many others millions in profits, gains of infinity on zero investment with lots of borrowed money.
The Risk-Reward theory works well only in a gambling casino where in roulette, for instance when a “conservative” bet is on red or black, there is only a 53% chance you will lose all your money. If you win, you double your money. In 1000 bets, you will lose at last 6% of your money to the “casino grind.”
On a single number roulette bet there is a near 94% chance you will lose. Yet the “reward” is that IF YOU WIN, instead of even money, you would get back $36 for ever dollar bet. Please don’t quibble over the exact odds. This is about right. It depends on house rules, how many green zeros there are on the board and a few other factors. None the less, the casino grind will take around 6% of your money if you bet a large number of times –say 1000 bets. Of course the reality in Casino gambling is that punters keep playing until their bank-role is gone. They seldom quit when they are ahead.
Thus to answer the question, I would just hold on to your limited funds until you can make what you consider to be a no risk deal. Find deals you could go into without any investment or risking of any of your own money. Alternatively, find any product or service you could re-sell without putting up any money. This is really quite easy to do –if you make the effort.
The other old saw, “It takes money to make money” is equally untrue. What is truer, is “If you want to make a small fortune quickly, start out with a large fortune and invest with the crowd!”
You may have to think about that one for a few seconds before you get the joke.
Real estate is a field where you can easily get to know the local market and the mechanics of subdividing property, getting loans, managing rental property, and buying and selling distress or foreclosure property direct (without brokers, lawyers, etc.).
IMO, this is the surest way to become a multi-millionaire …
My old out of print book called “Think Like A Tycoon” (now digital) is good for embryonic real estate magnates. I have also written a few more things on this and similar subjects – some published by Eden Press of California. Needless to say, I will gladly answer reader questions. I find that Quora answers (free!) are usually pretty good — except when Quora gets flooded with bad advice planted by promoters of get rich quick fraudulent schemes like “Binary Options.”….
I don’t want to make enemies, so I won’t publicly name any more of them… But anything formulaic or connected with stock market, forex courses, binary or other option trading is a game for suckers & fools. There are no secret algorithms or magic words for sale for $39.95—or any amount.
Fools and their money are soon parted.
None-the-less, buying and selling things where you already have a willing buyer I called “arbitrage.” This has always been a no risk path way to serious wealth. You don’t need seed money for that activity —just credit or other people’s money.
You do need to know what you are doing.
You need buyers who will pay you more than the sellers of the same thing will sell for.
Every dealer in every product or service does exactly this.
If you have some very special skill and expertise —- like being a brain surgeon, rocket scientist, or computer game writer you can also make money without money risked or invested. The so called theory of Risk vs. Reward is useless and wrong. And that is the secret.