Investing to get rich is the most obvious reason to invest but there is a hidden detrimental flaw in this when it comes to this belief, and investing because we win some and lose some. Think about it this way, consider a 3 times coin toss – heads: you win a hundred shillings or, tails: you lose a hundred shillings. Based on mathematical probability you’ll win half the time and lose half the time. However, suppose if you win two hundred shillings for heads and only lose one hundred shillings for tails, your chances of making money increase.
This is the fundamental basis of expectancy in investing – we invest to increase the probability of making more money over time than we lose. Basically management of risks by producing a positive mathematical expectancy each time based on historical research.
You are probably wondering why am delving into this. The reason is many of us invest with the mentality of winning all the time rather than minimizing risk. Therefore, we always make what we consider as ‘good’ investments and neglect the unpleasant side of those so-called ‘good’ investments.
Mathematical expectancy is basically computing the average amount of money we expect to gain or lose per shilling invested at risk and it depends. This figure depends on various factors such as the number of times you make money, commissions paid, the frequency of investment and the size of profits against losses made.
Risk minimization makes building wealth much easier. You do not have to work as hard to recover your losses and that is why expectancy investing is the key to building true wealth.
So how do you get into this?
Firstly, figure out why you want to achieve wealth, for this reason, will help you overcome the hurdles. One needs a deep drive that will sustain them in the long run. Secondly, expectancy investing requires you to learn about investing and understand it fully. Make it your priority to be an expert, if you want to achieve financial independence. There is no get rich quick methods here but the effort and hard work. And finally, with a plan in place, start out with smaller amounts spread out in various assets. Then adjust accordingly to minimize losses when you make mistakes until you figure out the process that best works for you.
Happy Investing!