Baseline for Return on Investment

You have to have a baseline you will not go below as a stock option investor. Phil Town give a valid reason why RULE #1 investors aim for 15 percent investing return. The reason is that anything lower is just too low to account for the risk of investing.

stock trading originally learned this when I was doing venture capital that the rate of return we had to air for in a early stage business of business development (assuming everything worked as planned) was at least in 50%  range per year.  options trading did that because in venture capital investing in a typical portfolio of ten businesses, most often two of them would fail most certainly, another 5 would do far less than Phil expected, and 3 would succeed or exceed  investing expectations.

In order to maintain a rate of return that was acceptable, we had to be sure that on the 3 that did well, our rate of return was astronomical to pay for the rest of the investments that did not do so well.

It’s part of a Rule #1 mentality.

First, we begrudge losing money on anything.  We do our homework to make sure we are certain we won’t lose money.

Then, if we do lose it, we expect that we will exceed expectations on a few investments, and those excess returns will make up for the losses.

If we settle for valuations of businesses that are based on a lower rate of return like, say, 8-9%, we will be getting in at higher valuations and thereby have less upside because we bought in too high. With less upside potential, we are going to have a lower overall rate of return because there won’t be so much profit to fill in the holes created by the occasional screwup.

Keep your default rate of return (or “discount rate” if you’re using Investools) at the expected overall rate of return in a RULE #1 portfolio.  Yes, it will make it harder to get into some good deals — but you will be glad you were patient when the occasional deal you did get into launches to the moon because you bought in at such a great price.

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Tags: investing, investing basics, Phil Town, phil town rule #1