The Lens Of Asymmetry
The Efficient Market Hypothesis (EMH) claims that if an investor wants higher rewards they must take greater risk. This belief in the symmetry of the public market is one of the pillars of EMH. The idea that you can find an investment that is low-risk and high-reward, on the other hand, would be asymmetrical. Warren Buffett, and other similar investors, insist that this asymmetry is exactly what has given them their edge.
You can find a similar edge in all areas of life. Viewing life through an asymmetrical lens helps me make choices from “where to place my mug on the table,” to “should I invest 25% of my net worth into a single company?” Yet, I often find friends and colleagues who, through lack of awareness, either don’t recognize great asymmetrical opportunities or fail to avoid poor ones.
To fully understand the possible breadth of an asymmetrical lens, it’s useful to define it.
Asymmetry is anything where effort, energy, or capital results in a differently-sized response. When the effort and results are equal, you simply have symmetry.
Imagine you’re swimming upstream. You’re going to exert a lot more effort to go the same distance than if you were swimming across a still lake. That’s negative asymmetry. If you’re swimming downstream, on the other hand, it’d take a lot less energy to go the same distance. That’s positive asymmetry.
The first step to being able to use asymmetry to your advantage is recognizing when a situation fits in one of these three buckets.
- Hydraulics (putting 1lb of pressure to receive 10lbs of pressure on the other side)
- Flipping a coin where you either lose $1 or gain $2
- Betting on a horse race where you have insider knowledge
- Gambling in any casino (odds are always in the casino’s favor)
- Flipping a coin where you either lose $2 or gain $1
- Buying a last-minute plane flight (they ramp up the prices to be higher than average)
- Working as a teacher (your output is linear with your input)
- A seesaw (leverage point is balanced)
- Flipping a coin where you either lose $1 or gain $1
I suggest taking a minute and asking yourself, “what are the positive and negative asymmetries currently shaping my life?”
As you begin to seek and find these asymmetries, you will discover that most informational asymmetries tend to be hidden or obscure. An informational asymmetry could be defined as any time you gain an advantage because you know something that someone else doesn’t know. One of the reasons the internet is so powerful is that it democratizes information that previously was unavailable. With all this in mind, you might see that asymmetrical information ceases to have an advantage when it becomes common knowledge.
Another challenge of spotting asymmetries is that sometimes they are hidden and can only be found when looking at a larger picture. Some people refer to them as “silver linings.” For instance, most people believe startups are symmetrical due to their high chance of failure and likely bankruptcy when compared to their sky-high reward if they succeed. The subtle aspect is that even if you completely fail, you have gained in at least two other ways:
- Lessons from the failures along the way
- An entrepreneurial reputation and brand for yourself
This makes even a failed startup a positive asymmetry when you realize that these benefits weren’t weighed in the initial risk vs reward equation.
Let’s use this lens to dive into a few areas to see how to apply it.
Career choice: not all hours are equal
Naval Ravikant, the founder of AngelList, may not have originated the idea of asymmetric outcomes for the same number of hours, but he did recently popularize it:
“One thing about business that people don’t realize: it takes just as much effort to create a small business as it does to create a large one.
Whether you’re Elon Musk or the guy running three Italian restaurants in town, you’re working 80 hours a week; you’re sweating bullets; you’re hiring and firing people; you’re trying to balance the books; it’s highly stressful; and it takes years and years of your life.
In one case, you get companies worth $50-$100 billion and everyone’s adulation. In the other, you might make a little bit of money and you’ve got some nice restaurants. So think big.”
– Naval Ravikant, How to get Rich
Why do janitors, fast food workers, baristas, and other “service class” industry folks make minimum wage? Many of them are working just as many hours as software engineers or managers. The answer is asymmetry.
One software engineer can make a change to a website that affects millions or billions of people. This makes their potential impact far outweigh their individual effort at work. One reason companies pay coders such extremely high salaries is that they’re hoping for this asymmetrical impact.
If you want an asymmetrical path, you must choose something where your efforts are multiplied.
When looking at different career paths it’s worth noting that technology is a natural force multiplier. Most service and operational jobs, on the other hand, are symmetrical. Let’s take the profession of teaching.
As a tutor, you’re teaching someone one-on-one and the ratio of your input to output is 1:1. Or, as a local teacher, you might be teaching a class of thirty, the ratio moves to 1:30. If you’re the head teacher, your impact could even be multiplied to 1:1,000. If you’re able to create courses that anyone can follow online, that could result in a very high multiplier like 1:1,000,000. Another career path would be to get on the school board for a city, state, or country. Both your efforts and hours are again multiplied by increasingly larger amounts. Greater asymmetrical impact is also often accompanied by greater income and prestige.
I once asked the wealthiest man I knew, an immigrant who came to America without wealth, for his advice on wealth creation. I remember his words to this day:
“You want to be able to do more and more with less and less until with the push of a button, you can move a mountain.”
I like to compare this with the teaching example above and think about optimizing all those hours spent. When you transition from tutoring someone 1:1 to teaching a class, you are doing more for roughly the same. When you transition to creating curriculums that others are teaching, you are doing even more with less. Eventually, at the top of this pyramid, you are able to make a metaphorical mountain move with little effort.
Whether you choose technology or any other profession, an asymmetrical lens can guide you to a more lucrative career path.
Investing: how to find your edge
We now know that asymmetry is how Warren Buffett finds his edge. We also know that informational asymmetries, the type used in investing, tend to be hidden. Remember that the Efficient Market Hypothesis states that all investments are symmetrical between risk and reward. This belief comes from the idea that equal access to the same information removes any edge that someone might have.
“Naturally the disservice done students and gullible investment professionals who have swallowed Efficient Market Hypothesis has been an extraordinary service to us. In any sort of a contest — financial, mental or physical — it’s an enormous advantage to have opponents who have been taught that it’s useless to even try.”
– Warren Buffett
In addition to this brief quote, Warren Buffett has refuted the Efficient Market Hypothesis thoroughly, and multiple Nobel Prizes have been won by proving that the market is not always efficient (i.e. symmetrical).
At the core of Buffett’s refutation lies this simple belief: asymmetries occur when investors have different timelines for their investments. Successful investors often have 10- or 20-year timeframes, sometimes longer, while institutional investors will lose their jobs if they have a bad year or two.
This means that when a company like Chipotle has an outbreak of E. coli, as it did in 2015, institutional investors exited in droves, dropping the price by 25%. Meanwhile, a common investor who doesn’t need to be worried about the next year or two of returns can take advantage of the asymmetry that now exists between price (risk) and potential profit (reward). In this case, Chipotle has tripled in the last 7 years, tremendously surpassing the market average and benefitting all the investors who stuck with it and took advantage of this asymmetry.
Another way of looking for asymmetries, specifically for investing, is to focus on minimizing the risk of the investment. If your probability of loss is near zero, your chance of finding a positive asymmetry is much greater. Many of the people who suffer great losses in the stock market have focused on the upside and (incorrectly) believe they have found positive asymmetries.
It’s easy to fool ourselves when we get excited or try to jump on the bandwagon of a seemingly “hot” investment. As it turns out, we’re much more accurate in finding positive asymmetries when we focus on reducing the downside. This turns the idea of “low risk, low reward or high risk, high reward” concept on its head. In the words of another accomplished investor, Mohnish Pabrai, “heads I win, tails I don’t lose much.” In the long run, using this focus-on-the-downside mentality as your investing asymmetry often leads to an impressive increase in your wealth.
Let’s look at an example of how to reduce your downside. If the average house sells for $100,000 in a given area, but you have an inside connection offering it to you for $50,000 (all other things equal), the odds of you losing money are asymmetrically low while making money are asymmetrically high. Obviously, we should all be so lucky to find such a deal. But they do happen, they usually just take more digging to find.
The same investing asymmetries can exist in your day-to-day shopping. If you are willing to wait for your favorite product to go on sale, whether that’s Black Friday, New Year’s, or any other sell-a-thon, you will likely get a better deal. For example, the DNA startup, 23andMe, sells their Health and Ancestry kit for $200. On Black Friday, they sell it for $100. Value investors believe that the way to succeed is to buy something below its value, which gives you asymmetrical results.
Fighting clumsiness with asymmetry
Do you, or do you know anyone, who knocks over mugs, drops plates, or spills coffee? While it may seem trivial, these small things can result in heartbreak from broken heirlooms to buying new laptops due to coffee-coated circuits.
I’ve certainly had that embarrassing moment of breaking a glass at a friend’s dinner party, it’s never the type of attention I want. And I know many people who consider themselves clumsy, and some of them believe it’s part of who they are, not something that they could change or control. So, I started analyzing, and through changing my habits as well as some of my friends, I now firmly believe that most of these items can be changed through conscious decisions through an asymmetrical lens.
Instead of putting a coffee mug on the edge of a table (where it can easily be knocked off), just move it towards the center of the table a couple of inches. Then, it simply falls on the table if it gets knocked over; it doesn’t break. You are using the same effort but getting a better return. This is a two-minute change, not an extended coordination program to revamp your muscle memory.
Instead of drinking something over your laptop, ensure your arm movements never go above your laptop.
This isn’t a “clumsiness solution” but a “preparation for the downside.” It makes the worst-case scenario not so bad and can be done with the same amount of energy. It’s important to remember that a reduction of a negative result for the same effort is still a powerful asymmetrical advantage.
Marketing through niches
If you can certify food as Kosher, you have opened up your product to a broader range of customers (though only 0.3% of the population). At the same time, the rest of the population doesn’t care, so you haven’t lost any customers. Asymmetry.
This example, taken from Nicholas Taleb’s book, Skin in the Game, serves as a poignant example that can be replicated across many different industries.
A quick word of warning, sometimes people think there is an asymmetry without fully understanding the niche. Some food companies thought that using sucralose or aspartame instead of sugar would work in this way. “Same sweetness but with no calories!” Consumers, however, concluded that it wasn’t worth it for other health reasons. These companies gained some customers and lost others, which would be a symmetrical outcome.
The paradox of using your natural aptitudes to get ahead
“You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you have an edge. And you’ve got to play within your circle of competence.”
– Charlie Munger
When you play a game where you have a natural aptitude or an edge, you are more likely to win. You are more likely to get the reward (if there is a reward), and this can be used to great advantage in a number of fields.
The problem is an old one: happiness. One of my favorite definitions of happiness can be defined as, “surmounting obstacles on your path towards a goal.” I think you will find there are innumerable quotes about finding joy in the journey and not the destination.
There is tremendous value in separating for yourself the activities that you do for happiness and the activities you do for reward.
This entire article has been focused on activities you do for reward. There are many stories of people who lost their passion when they began to do it professionally. Being told that you must paint to pay your rent rather than painting because you enjoy the visual expression are dramatically different experiences.
When happiness isn’t the objective, positive asymmetries can only serve you. I hope that this lens and these perspectives help you find your edge, I know they certainly have helped me. I encourage you to find where you can multiply your efforts, and generally, produce an outsized impact in any number of areas in your life.