Quote:
Originally Posted by singlad
Hi Bro Singlad,
I know what you're getting at. Yes, I know the probability of FDA approval is only 30% within 3 months n I hv factored it in my calculations of risk vs. reward.
Let me explain it in a simpler way. Using the same odds in the biotech start up.
Supposing u r betting 100 hands or more w/ a friend Henry. The bet for each hand is $5, 30% of the hands u win, when u win u make $15. In 70% of hands u lose n when u lose, u lose only $2.5. You n Henry play over 100 hands n the law averages will ensure u win abt 30% n Henry abt 70%. Would u want to play the game? No? Or would u want to switch place w/ Henry instead?
I would love to play YOUR hand w/ that kind of odds all day long, every day, indefinitely. Wont u? It's like having ur own money printing machine. 
One other thing. If the FDA doesn't approve the product in 3 months n the stock price is cut in half, all is not lost. I would load up at $2.5. Why? I'm very confident that eventual approval will come within 2 yrs, after more data r provided, n the stock could be worth a lot more than $15 in the years to come.
Therefore, there is a 70% probability of my short-term loss, but greater long-term gain. And a 30% probability of my short-term gain, but smaller long-term gain. I'm ok either way, hahaha. I prefer the short-term gain bcos "a pretty SYT in bed is better than 2 or 3 in the phone list." 
Cheers!
Bro WB |
Hi Bro WB,
I respect your rights to take whatever risk you want with your investment and I do wish you well in your investments. I just like to explore this issue of which of the two factors is more crucial in any wager. Is it having favorable odds or is it favorable risk reward ratio?.
Take your above example where you have only 30% chance of success and the payoff is $3 for a $1 bet ( same as $15 for a $5 bet) and a 70% chance of failure and the loss is $0.50 for a $1 bet (you lose half of the bet). Here the odds is 3 to 7 and the payoff is a possible gain of 90 sen (30% x $3) and a possible loss of 35 sen (70% x 50 sen) and the risk reward ratio is 1 to 2.57 (90/35).
Say you now load up on this investment and put 50% of your total portfolio in it. On balance, it is more likely that a 70% event is more twice likely to occur than a 30% event. Hence, you are likely to lose 25% of your portfolio after the first round. In the second round, the chance of a consecutive loss happening is now likely to be 49%( i.e 70% x 70%) and so you double down and put another 25% of your initial total portfolio in and you total commitment to this investment is now 50% of 75% or 66.7% of your reduced portfolio. At this junction, you only have even chance of success. If you lose again, your portfolio will be reduced to only 50% of your initial capital. After another two more negative rounds, your capital will have been depleted to such an extent that it is very hard to recoup back.
Let me take the recent world cup as an extreme example. There are 32 teams competing in the recent world cup. So the probability of any team winning it is 1 in 32 or roughly 3%. Now the payoff for North Korea winning is something like 1 for 2500. So if North Korea win, every $1 bet you place will make $2500 and so the risk reward ratio is something like 77x ((2500-31)/32). You have $100 to bet and you load up on North Korea and put $50 on North Korea to win and and the balance amount equally on all the remaining 31 teams. It is likely that you will lose most of your money. So should we focus on the risk reward ratio or on the odds first ?
My view is that we should focus more on the odds and only bet when we have favorable odds if we want to amass wealth. And if the payoff is also favorable, we should only then back up our truck and load it up as much as we can afford. The problem is that such favorable situation does not come everyday or even every year and hence it is truly boring to do even for a boring guy like me.
If the odds are even or against us, we should only play for limited stake and for amusing ourself like in games involving KTV girls where it can be a win win situation. If the girls lose, they have to suck us and if we lose, we will have to do likewise to them.
Cheers and again I wish you well in your investments and in BY.[/QUOTE]
Wow I am always amazed by the geniuses in this forum...looks like there is one more...
Anyway I am sure Bro WB knows what he is doing...he won't reach his status today if he were that stupid not to know his odds...