Some random thoughts about risk
|May 8, 2012||Posted by Oddmund Grotte under trading topics|
Risk is a very negative word for many, but as a trader you have to face financial risk (even ruin for some kamikaze traders) every day. But to make a living trading stocks you have to face risk in a bold way. IMO, the greatest opportunity for success goes to those who are not afraid of taking risks and at the same time managing risk in a proper way (and knowing excessive risk may lead to total ruin). By that you have to analyze risk in accordance to potential reward and to feel a little bit of fear. Success may come to those without fear, but many of the fearless have fallen by the wayside (and we never hear about them).
Actually, the biggest risk is not taking any risk! If you want to make money trading, you have to take risk. There is no way you will make money by being risk-averse.
That also means not afraid of looking stupid. Remember that learning is inhibited by caution and experimentation. Children who are afraid will never learn. Children with totally risk-averse parents will struggle in an uncertain world. Children are in general not afraid of looking stupid and they are therefore much more adaptive than adults. Just look at how easy they learn a new language.
IMO, risktakers are not looked upon very much in the Western society. In our paternalistic socialdemocracy politicians and bureaucrats seem to have only goal: to limit risk. In the not to distant future you will probably see a lot more rules and laws for proper conduct to limit risk. Is this the way we will face the future? No doubt the recent reduction of the risk tolerance bands in our society may inhibit much new learning on many fronts…What would the world look like if the Orwille brothers did not risk their health when trying to fly? Louis Pasteur had to fight religious dogmatism to create new and better chemicals. There would be no improvement in living standards without risktakers. I, for one, have a tremendous amount of respect for those who are willing to go different paths than the traditional ones. You need courage to do that.
In order to succeed you have to face risk, no doubt about it. It takes perseverance and courage while enduring pain to keep moving forward toward success. The stock market is no different.
Remember Napoleons famous saying:
Pessimists never won any battle. Forward!