Wealth Secret Of The Day – You Cannot Avoid Risk, But You Can Manage It

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Wealth Secret Of The Day - You Cannot Avoid Risk, But You Can Manage It
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“All of life is a gamble, as every adult knows… The Swiss did not become the world’s bankers by sitting in dark rooms chewing their fingernails. They did it by facing risk head-on and figuring out how to manage it.” — Max Gunther, “The Zurich Axioms”

“Discovery is dangerous… but so is life. A man unwilling to take risk is doomed never to learn, never to grow, never to live.” — Frank Herbert, “Dune.”

“‘What if they come after us?’ said Mr Bucket, speaking for the first time.
‘What if they capture us?’ said Mrs Bucket.
‘What if they shoot us?’ said Grandma Georgina.
‘What if my beard were made of green spinach?’ cried Mr. Wonka. ‘Bunkum and tummyrot! You’ll never get anywhere if you go about what-iffing like that. Would Columbus have discovered America if he’d said “What if I sink on the way over? What if I meet pirates? What if I never come back?” He wouldn’t even have started.'” — Roald Dahl, “Charlie and the Great Glass Elevator”

“Risk is the unwanted subset of a set of uncertain outcomes.” — Cornelius Keating

“…A fundamental idea in finance is the relationship between risk and return. The greater the potential return one might seek, the greater the risk that one generally assumes…” – http://wikipedia.org/wiki/Risk

Risk is a controversial subject, and one of the most common causes of disagreement about what should be done.

Some will simply advise you not to take risks. These are the “extreme school of play-it-safe” – who will advise that you should always take the sensible, lowest risk option. They typically consider themselves the wisest of all and are the first to criticize anyone taking more risk than them. They also love to cite examples of risk takers who lost… and they can easily find an example to gloat over.

At the other extreme, there is recklessness – throwing oneself carelessly into dangerous ventures without due consideration or self-control.

However, there is a “middle school” – which I have called the “necessary risk school”. This is because one of the pieces of wisdom passed on to me as a youth by my wise father was “Only take risks when it is necessary.”

Sometimes, risk is necessary. Max Gunther famously said in “The Zurich Axioms”, his well-known treatise on risk and investment, that no-one gets rich without exposing him or herself to “the danger of getting rich”. The simple fact is that without some form of risk, something ventured, there is no possibility of gain. Going out of your front door and striding purposefully down the street is ultimately a risk, yet we need to do it; because the risk of not doing it outweighs the risk of doing it.

Risk and reward are correlated. In most financial ventures, you cannot make absolute guarantees of gain. In investment and financial worlds, there’s a strong correlation between the amount of risk and the amount of possible gain – or loss. The “necessary risk” school understands the necessity of exposure to risk in order to include the possibilities of great gain. This school plays the game, aware of the risks, calculating them, and playing to win.

The “middle school” is also aware of the fact that a little nervousness might bring about greater focus and effort – and that in the subject of enterprise, pure calm might not be the platform of greatest achievement. Max Gunther also states, amusingly, that if you are not a little nervous, you are not risking enough!

The secret? To calculate and manage risk as well as possible. To use it as fuel and be motivated by it to do things as well as possible. To be aware of it, to address it, and know the game so as to be able to play with skill.

Skillful play will enable you to minimize risk while maintaining the possibility of winning something significant. And you can’t score if you’re not on the field…

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