Why High Risk Lead To High Gain?
Author: Jim Thio

There are many myths and facts about investing. Some pseudo
facts are that, high return investments are risky and low risk
investments are safe. The truth is, there isn't any exact curve
that'll give risks as a function of return. Low return
investments can be very risky too when fraud happens, for
example.

However, the pseudo fact that risk correlates with return have
some truth in it. You need to understand what causes it.

Money doesn't make money. People make money. Someone else will
have to work on that money so the money can produce more money.
Let's call those people workers. Workers here include CEOs,
Entrepreneurs, all the way to blue collar workers. Those
workers organize various resources, including your money and
themselves to maximize their yield.

How much each worker gets depend on supply and demand.
Currently, due to centuries of prosecution and genocide, people
that are risk taking enough to be entrepreneurs, or love to
learn enough to be CEOs are under represented in the gene pool.


The market values the rare. So entrepreneurs and CEOs tend to
get paid way higher salary than blue collar workers, which are
often investors. The commies, realizing that, switches side by
supporting the interests of capital owners against workers'
interest by demanding lower CEOs salary.

Here, investors are those who just put their money and do
nothing else for the business. If you invest in your business
then you are both investors and workers. Your return as an
investor is the amount of profit that the workers are willing
to share you. For simplicity sake, let's just say that the
business is already established with constant revenue.

Say the business earns $100,000.00 a year. Now, the total
assets of the business might only be worth $100,000.00. So in a
sense, the workers in that business just get 100% ROI per year
right? However, even though the total assets of the business
are only $100,000.00, the business isn't worth $100,000.00. Any
business that yields $100,000.00 per year must be worth
$500,000.00 at least.

Here's the catch. Why in the earth are workers willing to sell
their businesses to you for a mere $100,000.00? Just like
workers have market value, money's salary has market value too.
We call it interest rate. The workers know that it's good enough
for you to get 20% ROI per year.

Hence, he's not going to sell the business to you for
$100,000.00. He's going to sell the business to you for
$500,000.00. If you pay $100,000.00 he'll only agree to give
you 20% of his business. You see. In a sense, business ventures
do not follow the pseudo fact mantra of "High risk high gain low
risk low gain." The risk and the gain depend on the skills of
the entrepreneurs and not on those curves.

However, when offers come to potential investors, that mantra
is used by workers to decide the ROI they feel the investor
deserves. If the entrepreneurs realize that they their business
is quite safe, he'll simply give investors low ROI. And that's
how the low risk low gain high risk high gain mantra becomes a
reality in the point of view of investors.

Exceptions to the Norm

If a woman works as a stripper, and gets paid, what's her ROI?
Given that she's working on a job that absolutely needs no
capital and she gets some money then the ROI is infinite right?
I would disagree. You need to take into account her beauty, her
boobs size, her sexiness, and her young age as assets too. We
can think of the value of the assets as how much we're willing
to pay her as a slave. In that case, the ROI is not really
infinite. I think it's not much higher than typical ROI. You'll
see more of it when discussing ones' worth.

Ones' own business can be thought of as an investment. You can
buy a product for $10,000 and sell it for $16,000 and get 60%
return within a month for example. Is it risky? No. many people
do it every month. However, in a sense, it's not really an
investment. If it is, we would have been a billionaire by just
keeping on reinvesting. It's business. It's investment that we
have to work for. In a sense, the real ROI is not really 60%
per month because the business it self has a market value. Just
to let you know that with some work, you can indeed get 60%
return on some of your money.

However, you got to work on that money rather than just fire
and forget. Hence, it's not an investment. It's more of a job
like that of a stripper.

Savvy businessmen get huge return and do no work. In that
sense, you simply need to recompute the real value of his
business. So in a sense, that's not investments either because
he can't simply enlarge his earning by infusing more money. The
market value of his business is so huge. If you take into
account the fair market value of his business as capital and
profit as interest, you can get the ROI by dividing the profit
with the fair market value. In that case, the ROI will usually
drop to the standard amount again.

And then there are risks that's inherent not in the investment
but in you. For example, investing offshore tends to be less
risky than investing in your own country. Why? Well, you'll
never know when the next time you bump into some frivolous
lawsuits, or have some religious fanatic committing sweeping
against your shops. The places where you live are the places
you often end up fighting others. We'll talk about it more when
we talk about offshore investing.

Some investing is quite bad. Putting money in the bank can
often yield so little return that the return is actually less
than the inflation rate. That means you actually lost money
every year. In a sense that's risky too because you're
guaranteed to lose your money every year. How's that for low
risk low yield. However, people do put their money in the bank
for the liquidity and to balance the risks on other
investments.

Manipulating Yield and Risk

Risk and yield can be manipulated. For the same yield,
investors can get less risk by diversifying his money. However,
the process is cumbersome. Such processes turn investing into
another business again. For the same risk, or for a very low
risk, investor can increase yield by leveraging his money with
borrowed money. This is usually done in real estate industry.
Banks realized that land value are quite stable and hence are
usually willing to lend money to land banking industry than
most others.


About The Author: Jim Thio is a silver medalist in
International Physics Olympiad. He's the author of
http://howtolearnmath.com a book on how to learn math well. He
also uses his Math skills to provide free financial, business,
and marketing advices in http://discussionbucks.com His
articles are featured in
http://FasterFinancialFreedom.com/art.390.0.html