What it means
People take a flier when they put money into a venture, a share or an idea that does not fit their normal careful approach. Typical examples are a start-up with no revenue, a very cheap share rumoured to be a takeover target, or a new product line in an unfamiliar market.
The attraction is a possible large gain compared with the amount risked. The phrase carries a built-in warning.
The money should be an amount the person can afford to lose entirely, because the most likely result of many fliers is a total or partial loss. Experienced investors therefore keep fliers small relative to the whole portfolio, sometimes at 1% to 5%.
The logic behind fliers is asymmetry. If a position can fall only to zero but can rise many times over, then a handful of winners can pay for several losers.
That only works when the position is small enough to survive being wrong, and when the investor has not borrowed to place the bet. In a business setting, a flier might be a pilot project, a minority stake in a young company or a trial in a new country.
Good practice is to cap the budget in advance and to decide what result would justify putting in more money. Without a cap, a flier tends to turn into a larger and less rational commitment.
Finance teams can judge a flier by estimating its expected value, which is the probability-weighted average of the possible outcomes. A positive expected value does not make the bet safe, but it shows whether the gamble is priced fairly.
In practice
Real-world examples.
Example
A salaried manager with a diversified pension invests $3,000 in a young drinks company run by a former colleague. She treats it as a flier and does not count on getting the money back. If the company fails, her retirement plans are unchanged.
Example
A mid-sized software firm sets aside $200,000 to test a product in a market where it has no customers. The budget is fixed for twelve months, and the board will only approve more money if there are signed contracts. The test is accepted as a flier because the downside is capped.
Example
A trader buys a small position in a share trading at pennies after hearing of a possible turnaround. He limits the position to 1% of his account and sets a loss limit. Within a month the news proves empty and he exits with a small loss.
Formula
Calculation
Expected value = (probability of outcome 1 x value 1) + (probability of outcome 2 x value 2) + (probability of outcome 3 x value 3)
An investor places $5,000 in a small exploration company. There is a 20% chance the position becomes worth $20,000, a 30% chance it stays at $5,000 and a 50% chance it falls to $0. Expected value = (0.20 x 20,000) + (0.30 x 5,000) + (0.50 x 0) = 4,000 + 1,500 + 0 = $5,500. The expected gain is 5,500 - 5,000 = $500, or 10%, but there is a 50% chance of losing the whole $5,000, which is why the size of the bet matters.Case study
Seen in the real world.
Larchwood Partners is an illustrative, fictional family office that manages $30,000,000. Its investment policy allows up to 3% of assets, or $900,000, to be placed in speculative ideas it calls fliers.
Over four years it made nine such investments of $100,000 each. Five went to zero, three returned roughly the original money, and one returned $700,000 after a larger company bought the business.
The illustrative result was a total return of $1,000,000 on $900,000 invested, which was a modest gain of about 11%. The family office noted that the single winner was needed to cover the losers, and that if it had put $500,000 into one idea the outcome would have been dominated by luck.
Watch out
Common mistakes.
- Putting in more money than can be afforded to lose, which turns a flier into a serious risk to financial security.
- Taking a flier with borrowed money, which can create losses larger than the original stake.
- Adding more money to a failing flier to recover the loss, instead of treating the original amount as already at risk.
Questions
People also ask.
What does it mean to take a flier on something?
It means to take a calculated chance on a speculative opportunity, usually with a small amount of money.
Is a flier the same as gambling?
The two are close, but a flier is usually based on a reasoned view of an asymmetric payoff, while pure gambling relies on chance with no such analysis.
How much of a portfolio should go into fliers?
There is no rule, but many advisers suggest a small share, often 1% to 5%, so that a total loss is tolerable.
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