Understanding Risk in Investing...

Infinite number of factors influence the future. This results in large entropy (more randomness), and the weak relationships between many possible outcome events. 

Hence, the future events cannot be predicted with any consistency.  

This brings me to my next point:

We should not see future as a fixed outcome and capable of being predicted. 

Rather, future should be viewed as a range of possibilities.  (hopefully on the basis of insight into their respective likelihood occurrences, as a probability distribution).

This uncertainty, as to which of the possibilities will occur, is the source of risk in investing. 

Risk means more things can happen than will happen.

Reverse of above is also true. Even though many things can happen, only one will.

For investing, there should be two main risks to consider:

1. Risk of permanent loss

2. And risk of falling short. 

Either one can be eliminated but not both. In other words, we should consider the risk of not taking enough risk.

Another risk to be aware of is FOMO risk:  risk that comes from excessive Fear Of Missing Out (FOMO).

Whereas Risk Control is mandatory, Risk Avoidance is not an appropriate goal. 

This is because of simple reason: risk avoidance usually goes hand-in-hand with return avoidance. 

Risk Avoidance <==> Return Avoidance

One should not expect to make money just for bearing risk. 

At the same time, we should not expect to make money without Bearing Risk.

In short, Move forward, but with caution.

Also Read my old post: Understanding Risk

Source: My understanding of OakTree's memo Risk Revisited.
Image Credits: iStockPhoto

Be Worried..

http://bit.ly/9cF2Ot

"...one of the best ways to protect against a decline in purchasing power is to buy whatever is "out of favor, loathed and despised." So forget about gold or other trendy hedges. Instead, wait patiently for markets—European stocks, perhaps—to get so cheap that they turn most investors' stomachs. Then you can pounce."

"Sometimes, when you can't figure out a good defense, the best thing to do is to go on offense."

Investing and Happiness...

Silence speaks much more than words.  The best way to win an argument is not by arguing, but by action.

I see people wasting time arguing about how the stock they are investing is much better than another stock. This will not make you wealthy and happy.

We invest not to prove someone right or wrong or for the sake of theories, but to create wealth.

Investing should be silent, with actions.

Over the years, things have become easier for people who believe in – long term value based investments.

Thanks to the wide reach technology, internet forums, blogs and business news channels…more and more people are being deprived of thinking long term.

As we have seen in recent times, this can lead to sharp falls in stock prices of as much as 25% on a single day, that too, just on the basis of some negative news or court cases… which might be of a temporary nature.

Internet trading enables people to take decisions within seconds – and act on temptations.

I believe, because of all this we can take advantages of such situations. :)

When markets are climbing high, most people feel tempted with a sense of desperation to rush in and put money. They feel left out, and can’t resist temptation to buy. You can suddenly see many providing stock recommendations (free or paid) in a bull market.

Money doesn’t come to people who are constantly scared and afraid.

Just be open, happy, large hearted and confident – you will automatically start attracting wealth.

The best investors do the least amount of activity.

Sitting in front of a screen with numbers and watching CNBC, is not really what a fulfilling life is all about.  This, again, will not make you wealthy and happy.

And this definitely cannot be a great and recommended way to create wealth.

Every investor today needs to avoid an army of advisors and watching hundreds of news channels. He just needs to have the power of wisdom and knowledge with him.

Cut out the noise around you … and listen to the silence.

Invest silently.. Consistently. Avoid temptations. Don’t waste energy arguing.

Soon, when the world panics again, it will be time for a select few to create extraordinary wealth.