Reward : risk

the shape of the bet in one number · Risk & quality — durability and the shape of the bet

A single ratio: how much you could reasonably gain versus how much you could reasonably lose. 3 : 1 means three dollars of upside for each dollar of downside.

Upside = the value-blend upside (mostly our DCF). Risk = your distance to support, with an 8% floor — because sitting 1.5% above a support level isn’t really only 1.5% of risk (supports break). A high ratio is a well-shaped bet, not a guarantee.

reward : risk = upside ÷ risk
risk = max( distance to support, 8% )      (the 8% floor)

upside

— the value-blend upside — how far above price fair value sits

risk

— the downside estimate — distance to support, never treated as under 8%

• The Balance — understanding risk and reward ↗