Upside: downside ratio

The upside:downside ratio is one of the mental tools that I use more or less all the time. At one level, there isn’t too much in it, but over the years I have helped numerous colleagues and clients by applying it to their problems.

Firstly h/t (hat tip to, to prove I am young enough to be on twitter) the Bearbull column of Investor’s Chronicle, who taught me the model. Bearbull applies it as part of his methodology of choosing whether to buy or sell shares. Assess how much a share might go up in value if things turn out as promised, if the right things happen; and assess how much the share price might fall, on realistic or possible downsides. Then compare the ratio of upside to downside, and decide if you are comfortable with that ratio; or compare the ratio with other investments you could make instead.

I apply it basically in two ways, to client problems, and to helping colleagues and others, such as with their careers or other choices.

For instance, when assessing whether to adopt a particular tax strategy, be clear what the upside is- this can be a saving, or certainty, or assurance; the downside isn’t just fees; but the management time in understanding and implementing, the possibility that the consequences might be around for years, the need to handle complexity (when choosing between the complex method which you don’t really understand, and the simpler one that you do, it is surprising how many people choose the former, and not surprising how many of those later regret their choices, or whose successors regret the choices); essentially it is no more than thinking in the round, weighing up all options.

Or, for a colleague not sure whether to leave the firm, move offices, take a new role, put themselves up for promotion. The upside downside ratio is again here little more than a way of looking at pros and cons and then making a decision.

I recommend you try it out: anyway, what’s the downside in giving it a try?

Posted with Blogsy