How Much Risk?

There is only one message here. Investment is not about seeking high returns. Investment is an exercise in risk management.


Do you want high returns?

Of course you do. And we can give them to you. Canadian mining shares? Third World debt? Tech stocks?

Of course these returns are not guaranteed. In fact they are extremely high risk. You could lose your shirt. But on the mathematical probabilities your 'expected gain' (whatever that means) is likely to be higher than from more sober investments.

.....without any risk.......?

Oh, you don't want to take any risks? So you want a high return with no risk?

And where do you think you are going to find that? And why won't there be a million and one people in front of you in the queue?

You just want to be able to find good investments?

Well, there is no shortage of advice. You can try detailed financial analysis, advanced screening, charting and astrology. May we recommend "How to Become Rich Using Ten Simple Rules and No Effort" - a visionary text by an admired tipster. Unfortunately:

  • It's too late. The many thousand investment professionals who form the market have already read this text and acted accordingly. Well, they haven't bothered, actually, but that's because.....
  • It's junk. The very, very few people who have the gifts to consistently achieve high investment returns are running funds for themselves and/or their rich private backers, and are keeping very quiet about it. They certainly are not giving their secrets away for an author's reward.

Chasing high returns is a mug's game. It's fun, mind you. But so is betting on horses.

Manage your risk. Returns will follow

High returns are not lying around to be picked up. They are the reward for taking risk. And the investment game is to find that blend of risks that suits you, that you can handle and that you can live with.

Risk management is about taking chances. Specifically it's about choosing which chances to take.

A good investor behaves like a professional card player. In every move he balances risk against reward. He understands what he is hoping to achieve. He is aware of what he can afford to lose. In the jargon, he understands his appetite for risk.

A bad investor understands neither of these things. He has no plan but just wants to "make money." Or he wants to be absolutely safe, not understanding that without risk his financial rewards are severely proscribed. Or he takes risks unnecessarily, when a better strategy would allow him more reward with less risk.

Be a good investor.

 

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