Two or three words on risk

 

For the trader or the investor, the word risk is one of the principal keywords. Nobody knows what risk really is, so relax. On the other side, everybody knows what risk means: as animals, we continuously react to external stresses under a risk based strategy, intended to minimize the possible negative consequences. It’s something we have written in our dna, so no way to escape.

When we come to financial markets things get complicate: we put in place our relationship with money, and even something more: our future, our wealth, our possibilities. Yes, that’s it. And you really accept to take the risk to self manage your money and invest in the S&P 500 index? Are you… crazy?

What is  risk? It takes many forms: volatility, opinions, timing, liquidity, rates, exchange, … and  none of them really defines risk. They all knot themselves in a bullet that is pointed towards you.

I’ve been enlightened about risk reading Jim Slater’s “The Zulu Principle”. The explanation is simple and perfectly demonstrated: risk is ignorance. Risk is directly related with ignorance: more ignorance, more risk. More knowledge, less risk. In a topic that you manage easily and deeply, with years of experience, your risk is near zero. At this point, if you concentrate your attention of your real field of knowledge, where you are experienced and learned,  there you can find the key for making good investments with a near zero risk profile, whatever instrument you use. Otherwise, you may study the object of your interest, in my case the index S&P 500, and study for as long as you can manage it confidently. It may be a sector (energy?), a country (Japan?), an exchange rate (eurusd?), a commodity (gold?), etc. and you must master that topic, than your risk is really reduced at minimum.

So whenever you will find yourself drowning in a bad position and with losses, do not blame something or someone outside, just blame your ignorance and learn from the lesson. Knowledge is the key, a serious updated skilled knowledge. It’s not something you can boast of. To trade or invest proficiently you must be honest, first with yourself.

 

upcoming: opening the position

 

 

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