I have a few software engineer friends who diligently check my math when I send these out. So far, math seems right. Please see the end of the article for the links to other articles in the series.
I’ve spoken to some of you and found that one of the major concerns is risk. The age-old question: “What if I lose everything in investments?” The answer is—it’s unlikely if you’re careful. That’s why understanding how to assess risk is critical. This is where the magic happens, and it depends entirely on what you invest in and how.
I use stocks as examples because that’s how I generate money. My investment principles apply to all investments. It’s just matters of compounding profits and reinvesting them consistently.
I’ll cover trading strategies and math in the next few articles. For now, do not buy any investments. There are different ways to use volatility, stock and option pricing information. The example in this article is still incomplete. However, let’s keep it simple for now. It will get even more complex soon. We’ll talk about these later.
I should also mention that I’ve developed a software system to help with decision-making. It’s been extremely useful, even though it’s still missing some features I’d like to add. I’ll be revealing more about it soon.
Let me start with a personal example. I have an extremely high risk tolerance because I’ve been broke before. My close friends know that I can survive on instant ramen and rice, just the two items, for months.
Losing my entire portfolio would force me to declare bankruptcy and get a job. However, I could recover in 5–10 years while still living comfortably, thanks to my previous software engineering career.
That’s not the case for many people. So what should you do?
Remember how compounding works. The key insight is that you can invest small amounts over a long period and still generate wealth.
As Warren Buffett says, you should hold investments for at least five years to truly benefit.
This is a great rule to remember when there is a “market crash.” The mass media loves drama to attract your viewership in order to sell ads. Do not listen to them, even Warren Buffet ignores them.
I have a mix of multi-millionaires and everyday people reading this. Let’s ignore the comfortable readers for now—their portfolios can absorb six-figure losses without stress.
Hypothetically, let’s say you have $100 in disposable income after expenses. Can you get wealthy with this? Yes—but not by saving it.
A high-yield savings account offering 5% annual interest will grow $100 to just $179 over 12 years.
$$ \$100 \times 1.05^{12} \approx \$179 $$During those 12 years, inflation will likely exceed 5% at times. Even one or two years of high inflation can wipe out your purchasing power.
This is why it’s nearly impossible for the average American to retire. The system is designed to keep you comfortable—but working—while banks profit from your credit spending.
I know people worth $10 million who are still afraid to retire in their mid-60s because they rely too much on cash, which loses value over time.
So how much of that $100 should you invest? That depends on your comfort with potential losses. For beginners, I recommend starting conservatively and avoiding the early mistakes I made.
In my experience, a 30% debt-to-equity ratio works well. This rule is useful even if you aren’t borrowing money: risk 30% of your cash. That means risking $30 out of $100. You might ask: what can I do with $30? A lot.
Let’s use Ford as a concrete example. As of this writing, Ford stock is trading at $10 per share with an annualized 30-day historical volatility (HV30) of 22.17%. This implies a one standard deviation daily move of 1.39%:
$$ 22.17\% \div \sqrt{252} \approx 1.39\% $$This means about 68% of the time, Ford’s daily price change is within ±1.39%. At $10 per share, that’s roughly 14 cents a day.
Statisticians among you will recognize this as a simple prediction algorithm. There’s a real opportunity here to build a prediction model using artificial intelligence. Many people are already doing this—but none with an educational focus like my vision.
Let’s be conservative. If you can consistently trade Ford for just a 0.5% profit per day, your gains compound quickly. Over 20 trading days, $10 becomes $11.05.
$$ \$10 \times 1.005^{20} \approx \$11.05 $$So you might earn around $1.05 per share in a month—that’s a 10% monthly return.
But let’s be even more conservative and assume a 5% monthly gain. Over 12 months, $10 turns into $17.9.
$$ \$10 \times 1.05^{12} \approx \$17.9 $$Yes, that’s right: 80% gain in a year.
If you invest $30 a month, or 3 Ford shares, a 5% monthly profit gives you $31.50 after one month.
$$ \$30 \times 1.05 \approx \$31.5 $$To keep compounding, continue reinvesting your profits into more shares.
| Month | # Shares | Total ($) |
|---|---|---|
| 1 | 3 | 31.50 |
| 2 | 3 | 33.08 |
| 3 | 3 | 34.73 |
| 4 | 3 | 36.47 |
| 5 | 3 | 38.29 |
| 6 | 4 | 40.20 |
| 7 | 4 | 42.21 |
| 8 | 4 | 44.32 |
| 9 | 4 | 46.54 |
| 10 | 4 | 48.87 |
| 11 | 5 | 51.31 |
| 12 | 5 | 53.88 |
After 12 months, you can potentially grow to a portfolio worth $53.88 by starting with $30.
Remember to focus on percentage gains. At 80% growth annual, $1,000 would turn into $1,800!
On top of that, Ford pays dividends: 5.75% annual.
After one year, you bought 2 more shares and increased the portfolio value just from the profits.
They’re very realistic using my system. My projected profit this year is 50%, and I’ve already taken 30% so far.
It’s not quite 80%, but I’m earning about 62.5% of what I consider the theoretical maximum based on HV30.
With continued strategy development, there’s a good chance I can push that even higher.
It could happen. But this is where government bailouts—while unpopular—can actually help.
The U.S. has a strong interest in keeping manufacturing jobs and factories inside the country. That’s why certain companies are likely to get government support when things go bad.
In a fiat economy, the government can print money to help key industries. Yes, this can cause inflation or lead to higher taxes, but sometimes it’s necessary.
Why? Because if there’s ever a national emergency, U.S. factories can be converted to make weapons or other critical supplies. It’s not about expecting war—it’s about staying prepared and keeping the economy strong and self-sufficient.
When you hear someone complain about big losses in the market, ask: did they actually research their investment? Do they understand how the company works? Have they read any books on finance or economics? If not, they’re probably gambling, hoping to get lucky. That’s how people lose everything.
But once you start reading finance books, you’ll learn that some investment companies earn massive profits year after year. Renaissance Technologies is one example. They succeed by analyzing data and making smart decisions.
When you study people like Warren Buffett and learn how option pricing works, you’ll realize that most risks can be managed. I’ll cover that soon.
I hope this was useful to you. Please let me know your thoughts and ask me any questions you’d like.