In "Globalization, The Decade Ahead, and Asymmetric Returns" Zero Hedge offers an interesting graph showing the non-normal return distribution of the stock market. As you can see in the graph, the actual distribution doesn't at all match the theoretical normal distribution. Actual market returns do not present a normal "Gaussian" distribution that fits into a bell curve, so trying to measure such data with a linear equation that assumes a normal distribution is kind of like hunting for bear with a fishing rod. You may catch your bear, but... you may get a surprise if you expect to defend against a bear with a silly little rod.

I read the short article that accompanied the graph. Fortunately for us, most people who speak of asymmetries usually speak of asymmetric pay-off from what they call asymmetric assets, etc. For example, it had simple enough description of a condition that may lead to an asymmetric outcome:

Where there’s a good outcome, profits are extraordinary and so, therefore, are returns on equities and high yield debt. When the economy sinks, profits collapse, equities collapse, high-yield collapses — risk assets collapse. This produces bimodal distributions of return outcomes.

Then, it goes on to provide a good sounding story to define asymmetric pay-offs:

The most powerful defence against disaster in a portfolio is to invest in assets that because of the environment or a valuation that is depressed or elevated present asymmetric pay-offs. Interesting long positions lie in assets where if bad things happen, their valuation goes down only so much, but if good things happen, it goes up a lot. An asset that goes up very little if good things happen but collapses if bad things happen is an interesting short.

Some pursue asymmetric returns successfully while others don't. The definition of "success" is evidenced by actual historical performance. If you've examined historical performance of many, then you probably know most people don't end up with an asymmetric return profile: whereby their total return over a period is greater than their maximum draw-down (how much it declined along the way). As long as investors continue to believe the real way to achieve such asymmetry is to "find asymmetric pay-offs" because they believe they know in advance which are "asymmetric assets", then our edge will continue. If you believe you have a positive expectation (an edge that is likely to result in an asymmetric return) because you are able to "pick" assets that have positive asymmetric outcomes, then you will continue to help those of us who know better continue to do what we do. So long as people continue to believe they create their outcomes at the point of entry, maybe they'll continue to attached their ego to their right-hood. If they strongly believe they are right to begin with, maybe they'll avoid predefining their risk and when the big losses come their panic selling will be part of the contagion of selling pressure. If asymmetric price trends are big directional moves up or down (more of one than the other), you can probably see how it may all play out.

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