Risks (Love It Or Hate It, We Can’t Live Without It)
You know, recently I came across the important concept of “Taking Risk”.
In the video below, Tom Sosnoff talks about his interaction with this golf Caddy Master – Jimmy Rocko (who is around 40 or 50 yrs older than him) when he was 15 or 16 years old.
Passive Investing is Broken. Here’s how to fix it | Tom Sosnoff | TEDxUChicago (click here).
While he was working as a Caddy, during break time, they would take turns taking shots at a bucket which is filled with money. The caddies have to put money (a quarter) in every time they take a shot at it. It is like in a sense a form of gambling ‘venture’. Over time Jimmy made thousands of dollars from this gambling venture because he would only take a shot at the bucket when it made ‘sense’ to gamble. Jimmy understand the concept of “Pot Odds”.
Well, for one, Jimmy is a better golfer, but most importantly, he would only take a shot when the bucket is full of money and the odds are in his favor. Eg. the payout is much more than what he put in.
From Jimmy, Tom was able to learn about taking risks, quantifying risk (Pot Odds) and golf.
Then there is the below blog post by cheerfulegg. Like him, I used to gamble during Chinese New Year. Now as I get older – I tend to do this less often during CNY. Having known the risk-odd equation (not in my favor). There are better odds in stock investing if one is patient enough… and I have been quantifying risks the whole year (looking at stocks), CNY is for me a break from this :p
Teach Your Kids To Gamble by cheerfulegg (read here)
However, I do agree that it is important to teach your kids to gamble. Well not to be addicted to it, but to understand that luck does play a part in life and that there are more important things in life than winning.
However, I would add one more point – which I feel many of the youths in Singapore are lacking, and that is to take risks and from it, learn how to quantify risks.
Frankly, if I can get rich and comfortable by going through life without having to as much lift a finger, I would have never touched stocks or taken any risk with my money. There would be no need to.
“When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” Warren Buffett
I am a very risk-averse person by nature. So it is extremely weird to find me, investing the majority of my net worth in stocks most of the time. Or to try some other wacky ventures like Amazon FBA or P2P loans / Invoice Financing (in the earlier years, it would be insurance linked products, growth funds or unit trusts).
When I first started investing in stocks, I thought it was the ‘hardest’ way to make money. It still is. After all, when you have a job – your earned income is more or less guaranteed (well, you can be sacked or demoted etc, but you get my drift). My job is like an extension of my school life eg. if I stay within ‘the line’, do as I am told, put in as much effort as I can, do all the right things, I will get rewarded (pay + bonus). Simple. To many, that is all they do to get money (who has time and energy to do anything else…read annual reports? No way).
On the other hand, there is no “Right” or “Wrong” in investing. The concept of risk and quantifying risk was new to me when I first started investing.
In fact, I hardly made any profit for many years. Actually, come to think of it, the time spent on investing (studying companies and financials or even trading) just does not add up to the returns (profits). I think I lost more than I make for many years. And what about the time spent worrying and feeling sorry for your losses? Isn’t working life + family life stressful enough?
However, over time, I learn to quantify the risk (weight the odds vs the possible returns). I had to. In retrospect, I had no choice. It is either a loss or a gain. I am not rich, I earned my money the hard way. I am not born with a silver spoon in my mouth. I started my working life in a 5 figure debt (student loan). In one of my earliest trade when I started working – I lost close to my month’s pay in 2 weeks.
Every time I look at the stock price, the company details, and financials… I had to think about the possibility of a higher stock price, better future business prospect, regular or increasing dividend in the future. The losses I had in the past are still fresh in my mind.
As you get older, your saving should naturally increase – and the odds may get higher (the amount you invest in or may lose). However, hopefully, we should get better at quantifying the risks.
Or put it in another way – Is flying a plane risky? To many it probably is. But to a seasoned pilot doing this every day for the past 10, 20 or 30 years, it is no risk at all. However, if you are to ask the same pilot to ride a motorbike and if he doesn’t have a license to do so – he would be taking a big risk with his life.
“Risk comes from not knowing what you’re doing.” Warren Buffett
I don’t consider trading as investing. I may not be buying or selling stocks at the moment (or actively doing that since early 2016), but that doesn’t mean I don’t have my eyes on the stocks which I want to invest in. I reckon I am like Jimmy Rocko who always have his eyes on the bucket.
I don’t think we can avoid risk altogether. Taking a risk, by itself is not right or wrong. Perhaps, Tom Sosnoff managed to put it in a funny and witty way: ” God loves all of you, but God loves the ones who take risks a little bit more”.