176. Risk everywhere!
“Take calculated risks. That is quite different from being rash.” — George S. Patton
Just last week, my daughter left home for the first time, to join college in a different city. She is going to stay on the college campus and will be making day to day mundane decisions by herself, also not so mundane decisions too. In her weekend escapades, she may carelessly amble into a seedy neighbourhood of town and there is no bottom to such a misadventure. How can she reduce such a risk? For whatever it’s worth, my main advice to her was to assess the worst-case possibility for any step she is going to take and then, be sure that she is OK for that worst case to pass, if she were to take that step. I backed this advice up with a couple of hypothetical examples. Hopefully she understood this advice and is going to heed it.
“Courage doesn’t mean you don’t get afraid. Courage means you don’t let fear stop you.” — Bethany Hamilton
Risk is quite ubiquitous, really. We take on risk with every decision we make. This is so because decisions are generally made in the face of uncertainty. The very presence of uncertainty makes a range of outcomes possible, some of which may be adverse and hence the “risk”. While, in a number of situations, the risk may be marginal and hence may not require conscious diligence, I believe that it pays rather handsomely to have a risk-conscious view of life. By no means am I talking of a defensive approach to life. In fact, a defensive approach does not warrant much risk awareness. Risk based approach is crucial for an aggressive approach to life. For extraordinary progress, once a suitable path is chosen, it is all about risk management. To make this a bit concrete, if my daughter chooses not to foray into the city there is no risk to ponder on, but she will be missing out on valuable life experiences if she chooses not to venture out. Another example: if someone chooses to “invest” in fixed deposits of large banks, that person can get away with giving lip service to “risk management”. But this also limits the possibility of creating wealth. Whereas if a person chooses to invest in capital markets, the possibility of wealth creation exists distinctly but is likely only when the risks in investments are suitably managed.
“It’s not because things are difficult that we dare not venture. It’s because we dare not venture that they are difficult.” — Seneca
So, what exactly is risk? It’s a very broad question, so let me just say what I mean by “risk”: risk is the possibility of not meeting your goal or objective. In my observation, it is the ‘perceived’ risk that holds most people back from taking a progressive approach to life. Many of us do not go so far as to recognize the “real” risk because we do not overcome the bigger hurdle of “perceived” risk in the first place. Examples: I know of people who avoid driving on Hyderabad or Pune roads because they find it risky due to the apparent haphazardness. Well, if it was so risky, there should have been correspondingly more accidents but that’s not the case. Equity mutual funds and direct stocks may seem like risky investment products to many but then again, a non-trivial number of people are able to reliably create wealth using these instruments.
In financial markets, risk is generally quantified in the form of variance from the mean values. In other words, a statistical measure called ‘standard deviation’ is taken to be the cardinal measure for risk. Concepts such as “Standard Deviation” and “portfolio risk” are abstract and technical, and hence not really easy to grasp for everyone but have become very popular in the financial world because they can be quantified and compared. Ironically, they do not capture risk in the way we feel it viscerally. The risk that, I believe, matters most to investors is if they will be able to meet their financial goals or not. The volatility of your investment portfolio does not give any intuitive feel for the risk of you meeting your financial goals.
“Only those who will risk going too far can possibly find out how far one can go.” — T. S. Eliot
What can we do so that “riskiness” does not inhibit us from progressing against our objectives? How do we build confidence to take up pursuits such as to start investing in volatile investment products such as stocks, equity mutual funds and real estate so that we give ourselves a real chance at financial independence OR to start driving in cities such as Hyderabad (India), Pune, New York or on German autobahns OR to take up high altitude Himalayan treks or for that matter, treks in the Western Ghats or some other mountain ranges OR do presentations in front of senior leaders or large crowds OR to run a 10K OR to change jobs.
Bottomline
“Risk comes from not knowing what you’re doing.” — Warren Buffet
I believe that the best antidote for risk is knowledge. The more you learn and understand how things work, the more you will be able to determine the “real” uncertainties involved and the potential possibilities. This kind of knowledge may spur you along on paths that you previously deemed too risky to take up. For sure, knowledge doesn’t guarantee wisdom, but it increases its likelihood. For example, learning can help you understand the difference between calculated bets and pure speculation. With this knowledge, you will be more confident in taking up calculated risks and more prescient in avoiding gambles. Knowledge of what goes into making effective presentations or a training plan for running a 5K or a10K can arm you with the nuts and bolts to take up these activities.
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I spend most of my time helping people make better decisions, build financial intuition and build great careers.
