For some reason, I seem to be able to find stocks which go up by factors of 4, 6 and even once 10x.
It doesn't matter what you start from, if you can do this numerously in your life-time, you will be sufficiently rich. Turning $20k into $200k in a year or two only to repeat the process is what it's all about.
I've never been a huge admirer of Peter Lynch except that his quote resounds in me - "It's all about finding the next ten-bagger". That is what this website is about.
Clearly, the ideal scenario is arbitraging the financial markets. To make money due to a stock market mis-pricing with essentially no risk has got to be the best way to go. However, by definition these things don't exist every day or even every year.
So work through the reward/risk ratio. If you don't have an arbitrage, it means you need to take on some risk. If you are going to take on risk, why not be rewarded to the maximum for each unit of risk you are taking on? It's that simple. Minimize the risk, maximize the return potential.
Finance professionals have a term called Sharpe Ratio which measures the excess return from the risk-free rate divided by the volatility. However, the astute will realise that share price volatiltiy doesn't necessarily measure risk. If you bought an asset for $1, and the next day it jumps to $5, then falls to $3 and climbs to $15. Your volatility is huge but is that really bad? So the finance professionals coined a term Sortino ratio which essentially does the same but measure volatility to the downside.
