Fake risk, genuine risk, and the "cardinal sin" of most investors
Chapter 8 of "Getting a Better Class of Enemy", my investment book
I'm writing an investment book called "Getting a Better Class of Enemy - Money, Markets and Manias". As I write the chapters, they will be made available to paid subscribers to OfWealth. Previous chapters, along with the Preface and Chapter Plan, can be found by clicking on this link.
The reason for the title is that, as your wealth grows, there are a lot of potential "enemies" that will try to take it away from you. These are explained in Chapter 1.
"Money can't buy you friends, but you do get a better class of enemy."
Spike Milligan, Irish-English author and comedian (1918-2002)
This latest chapter focuses on the crucial but complex area of risk. What is risk? How should you think about it? How much risk is appropriate in the quest for profit? Does taking more risk always result in more profit in the end? (Short answer: Definitely not.)
I'll be honest. I had a couple of false starts with this chapter, and had to do complete re-writes. The challenge was to find the right balance between not getting bogged down in fancy mathematical theories, while still explaining just enough about how the investment industry looks at risk.
That's because, without first understanding what to ignore, it's impossible to know what to focus on. And I strongly believe that mainstream risk theories aren't of much practical use for most private investors.
But that doesn't mean that private investors don't need to think about risk. They just need to do it in a way that's relevant for their own investment approach and aims.
In particular, you need to take at least some risk in order to make sufficient profit to call yourself an investor. But taking any risk inevitably means that you must incur some losses along the way. It's getting the balance right that counts.
As always, feedback from readers is encouraged.
Please send emails to ofwealth@substack.com
Chapter 8:
Fake risk, genuine risk, and the "cardinal sin" of most investors
"The risk inherent in not taking enough risk is very real."