Skip to main content

RISK

 

Investopedia defines risk as “Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return.”

Different people define risk differently for some, it could be not earning on investment or a failed investment, for some it is not being able to beat a benchmark return sounds like risk.

How should we look at risk?

  • The risk would be taking permanent losses i.e. losing all your money

  • Risk is having forced to liquidate all your stocks because you don’t have money to take care of expenses

  • Risk is brokers calling for margins or force closing your position

  • Risk is losing the financial security of your family & dependents

  • Getting wiped out in business is a risk

  • Not being able to do what you love to do due to work pressure is a risk

  • Risk is putting yourself in situations where exists a possibility of dying even if it is 0.001 %

Let’s invert & look at what risk is not?

  • Share prices moving up & down every single day is not risk

  • Losing money in a company’s share is no risk as long as that is not the only position you have

  • Losing money while trying to build a business is not risk unless you bet your entire savings on it

    We need to take care of risks viewing the bigger picture. Risk in life usually comes from places which no one or very few imagined. It comes from what we don’t see. Who in his right mind would have imagined a virus shutting the world? Similarly very few had an idea that a bubble was building in 2008 which could wipe so many people out?

    As Nassim Taleb says that you need to look at companies which are antifragile i.e companies which would gain instead of loosing during black swan events like COVID 19, I think this model should be used by individuals too.

    You have to become antifragile when it comes to managing your finances. You need to have an emergency fund that can cover your expenses for 6-12 months in case you have to. Life insurance & medical insurance to protect you & your family. Then next would be allocating the surplus money which you have left to different asset classes like gold, stock equity, debt, PPF, fixed deposits, etc. Some cash apart from all this to be ready for situations like COVID.

    We need to understand that you need not chase returns always with whatever money you have. There has to be a financial-plan keeping in mind your personal situation. Morgan Housel says, “ Personal Finance should be more PERSONAL than Finance".” Read, read & reread it.

    Let’s end this with some line from Warren Buffet on LTCM,

    “to make money they didn’t have and didn’t need, they risked what they did have and did need. That is foolish”

Currently Reading:

The Psychology of Money


Comments

Post a Comment

Popular posts from this blog

Back to Basics

  A few basic ideas which I wish to reiterate to myself as they contain wisdom to think and become better. Embracing lifelong learning : If there’s one thing that should not stop no matter what situation you’re in, it is learning. Could be through reading books, watching videos, etc. The day we stop learning we almost stop growing. Reading opens up your brain, gives you a larger repository of knowledge to take information from, and a better reference point to think about. Time with Self : You’re going to spend the most time in this world with yourself, in your mind. You have to make sure it is a good place to be otherwise you won’t be happy. Things happen so effortlessly when you’re happy that nothing feels like a task. The way to improve your time with yourself is through reflecting on your thoughts as they eventually turn into actions and habits. Needless to say, it will help you know thyself better. Routine : One of the most important traits of any successful human being on eart...
Post a Comment
Read more

Pattern Seeking Brain

  “I gained because I knew this” “I had told you so” “I told you, stock X is going to double” “I knew this is going to happen, had predicted it long back correctly” What is one common thing you can sense in all the above remarks? The need to control, which stems from the need to predict and to create a narrative. Our brain is wired in a way that it needs to seek patterns in past events, analyze new information or events, and categorize them in accordance with past events. A narrative creating machine that we are, we find a correlation between the most random events which have the remotest possibility of being correlated. Let me explain, say you bought shares of Tesla. Is it suppose to obey you and rise in price because you bought it? The stock has no clue and is not even interested in knowing who bought it. Hell, it should ideally not even move just because Elon Musk tweets something. But it has moved in recent times whenever he has tweeted. Now there are two pos...
Post a Comment
Read more

What is the simplest way to achieve anything?

    How many of us have heard from our parents that if you want to become an expert at something, do it daily? I have heard this for a long but never really paid heed to it until I learned about Kaizen & used it in my daily life.   So what is Kaizen? Kaizen is a Japanese word that means "change for the better" or "continuous improvement." It is an old technique used by the Japanese to improve business productivity and efficiency by focusing on every small detail and improving how tasks are performed. Wait what does this has to do with how I can achieve my goal of lifting a certain weight, running a marathon, getting a promotion, creating wealth from the stock market?   Let us hear it from the modern-day Guru(I call him that) Charlie Munger  “Spend each day trying to be a  little wiser  than you were when you woke up.  Day by day , and at the end of the day if you live long enough-like most people, you will get out of life what you deserve.”...
Post a Comment
Read more