Thursday, March 26, 2009

Risk revisit

The toughest concept for this blog to get across is the preception of Risk.

This blog preaches that "High Return High Risk" is NOT the entire truth but comes with a twisted myth.  Basically that statement only apply to those who don't know much.  The more you know, the less risk it is.  The correct way of intrepreting Risk will affect another general miss-conception - diversitifaction - "Don't Put your egg in ONE basket".  Putting your eggs all you want but you will have to start with ONE and that better be the best one.

These intrepretations offer explaination to today's situation why so many investors couldn't make it even if they Diversify and believe High Return comes with High Risk.

This is not a new concept actually,
"Risk comes from not knowing what you're doing."  ~ Warren Buffett
"Volatility is NOT Risk." ~ David Dreman
This is not a debate on what the real meaning of Risk is.  Its a matter of how we should look at it so that we can do something about it.

If you believe in High Return High Risk, then when you enter into a potentially high return investment vehicle, you naturally accept that comes with high risk.  This psychological preparation puts you into a 'its ok to lose' state.  More than often people in this state will sit, wait and pray the worse wouldn't happen.  ( which you have just violated the 2 most fundamental flaw in NLP )

On the contrary if you believe Risk is something you don't know, then naturally you will try to find out more about this investment vehicle.  You may eventually pick the right vehicle or you find out how to deal with some of its limitation.  Either way, it puts you in a better position than the earlier scenario.

One of the greatest example of all time is that someone didn't think gambling is all that risky, as a result the whole school of technical analysis was introduced and is one of the hottest study one can get nowadays.

Gambling is risky, yes.  Avoiding it is temporary safe, yes.  By not knowing more about it, you risk getting into it without knowing it.  By thinking risk is when you don't know, you can learn why gambling is risky.  As a result you may come up with some new principals in life about gambling.  If you found out how to deal with this risk, then you would also have a set of solution dealing with 'this kind of risk'.  You may still NOT WANT TO get involve and this time, you can be very sure and understand why you do or do not do something.
"If you risk nothing, then you risk everything." ~ Geena Davis 

No comments: