Which is better? Avoiding risk and accepting risk in life, business and investing? Better a little certain than a lot of uncertain. These certainties apply to any situation in life in which we take risk. To get anything in life, whether it be monetary gain or raising the social status, we need to risk the capital of money, time or emotions. This is the inexorable law of life. Stock exchange traders know this and instead avoiding the risk, they knowingly take it. They join the game and speculate, but not blindly. Their trading actions are considered thoroughly and the probability of winning each bet far exceeds the potential loss. Stock exchange traders know that who doesn’t risk, wins nothing. Dogmas, I’m referring to undermine most of the rules, principles and investment formulas encountered every day in newspapers, radio or television. State of anxiety is a sign of health, not a disease. The biggest adversary is a boredom. Don’t be afraid of concerns. The concern is a struggle and a fight is a pleasure. If you do not worry, it means that you do not risk enough capital.
Avoiding Risk vs Accepting Risk
And here is how Mr. Loeb, one of the most serious financial advisers from Wall Street, recounts the story of two women. Worried Julia and the Crazy Marylin. Both finished higher studies and started to work in one of the biggest investment firms on Wall Street. Their financial situation looked identical – wages allowed them to speculate. Julie’s ambition was to find investments without any financial risk. She did not want to expose her capital on market fluctuations and opened a savings account in a bank.
Crazy Marylin worried about her capital, as each of the people do, but in order to multiply money more rapidly, opened an account in the investment company. A year later, Julia had still her capital plus a percentage from the bank, and the poor Marylin lost 25% of her money by buying shares. Julia began to lament on the misfortune of Marylin and Mr. Loeb began to worry that the loss will cause Julia to escape from Wall Street. It is known that the newcomers are trying to double their money in the first year, and if they do not succeed, they behave like naughty children. Marylin however had a temperament of a trader and replied to Julia: “Yes, you’re right, I suffered the loss, but also have gained – survived the adventure.”
Most people look at avoiding risk and being secure as if it was the most important thing in life. Psychologists and psychiatrists believe that a sense of security is a necessity, it is a requirement of well-being. According to them, a sense of anxiety is bad for mental health. Representatives of Eastern religions go one step further. Some Buddhist sects teach in the name of achieving inner peace, to give everything you have, and therefore live in extreme poverty. According to their study, the less you have, the less you care. The philosophy of dogmas presented here is radically different. It assumes that if your main goal in life is to avoid worries, you will be poor. What’s more, you will lead a very boring life. And boredom is the last step of all misfortunes. Life should be active, should be an adventure, and no vegetation. The adventure can be defined as an episode of life, when we face danger. A healthy reaction in such a situation is a sensation of worry.
Sensation of worry belongs to the most pleasant aspects of life. Take, for instance, an affair. If you are afraid of personal risk, you never fall in love. Or sport: athletes and fans knowingly expose themselves to distress. For fans, it is smaller, for the players much higher. But we’d never watch sporting events, if we were not excited and satisfied. Of course, we all need a moment of peace. We have it during a sleep for several hours each day. Eight to ten hours a day should suffice. Adventure adda even more fun to our lives, and to experience the adventure you have to take risks. Mr. Loeb knew it. He could not look approvingly on the proceedings of worried Julia. How much can you earn in periods when the interest rate is high? Six percent? Bring $1000 to the bank and after, that the bank gives you $ 1,060 back. Your capital is guaranteed and even if the interest rate falls, you’ll always get back your 1000 dollars.
But where is the adventure, the passion? And a hope to become rich? The $60 is taxable. After paying taxes your earnings will likely offset the inflation. It will not change your financial situation at all. Earnings from a job also won’t make you rich. At best, you’ll go through your life without being hungry. Most people dream of a good job. So they teach us in school, and at home: “If you don’t do your homework, you’d not get a good job”. But no one teaches us how to trade on the stock market. If you do not have a rich family, after which you’d inherit big money, your only chance to get out of the circle of the poor is the ability to take risks.
Remember that this is a two-way street when avoiding risk and accepting risk. Taking the risk doesn’t guarantee earnings. What’s even more, it hides the possibility of loss. In other words, you may also be poor. As a common, poor man, taxed, subjected to the risk of inflation, you have no choice. It does not make much difference if you suddenly as a result of a failed attempt to get rich, you’ll become poorer. Besides, if you’ll understand dogmas discussed here, you’re more likely to be rich than poor, because the ratio of earnings and potential losses clearly favors the earnings. If you’ll gain nothing, at least you’ll survive the adventure.
Example of worried Julia and crazy Marylin illustrates what can happen. When Mr. Loeb had heard about them recently, they were both in their fifties, after a divorce, and further were guided by their financial strategies selected years ago. Julia was still saving money in the bank, buying bank certificates and other safe securities. Her capital is not a subject to fluctuations, but inflation of the seventies made a havoc in the purchasing power of money that she held.
Her best move was to buy a house shared with her husband. After the divorce, they sold the house and divided the sum obtained from the sale. In the seventies home price has risen along with inflation, and they were both very pleased with this transaction. Despite this, Julia is not rich, and there is no chance for that to happen. After the divorce, she returned to work in the old investment company, where she intends to work until retirement. The basis for her maintenance are earnings from a job. Admittedly, she’s not hungry, but hesitates before buying each pair of shoes. She lives with her cat in a little cold apartment, with one bedroom.
Marylin is rich. Despite not encouraging beginning, she never changed her philosophy and undertook further risks. In the sixties she earned a lot of money on the shares. Her best speculation, however, was trading in the gold market. In 1971, President Nixon allowed Americans to purchase gold. The price of gold rose up. Till 1971 it cost $ 35 per ounce, after the decision of Nixon’s the price began to run high. Marylin was fast. She didn’t listen to conservative advisors, and bought a gold by paying 40 to 50 dollars per ounce. Before the end of the decade the price rose to 875 dollars per ounce. Marylin sold her gold at an average price of $ 600 per ounce. After the sale of gold she has become really rich, even though she lived in perfect conditions before the speculation. Today she has her house, apartment ownership, part of the island in the Caribbean and travels the world a lot. She hasn’t worked for years. Currently, she gets a lot more money because of the dividend than her earnings were at work.
It is true that Marylin lived with a sensation of worry during the years of speculation. This is perhaps the only consolation for Julia, who never had to worry about what tomorrow will bring, or wake up poor or rich. Julia always knew exactly how much money she will have for the year and approximately five years. It had to give her a lot of satisfaction. Marylin, on the contrary, had to guess what tomorrow will bring. She lived in a state of anxiety, worry, and sometimes it happened she did not sleep well at night. Avoiding risk and accepting risk are both possibilities, but the results speak for themselves.
Many years ago I read the story of Fred Kelly’s, author of book: “Why you win or lose”, which captures the mindset of conventional trader in the moment of decision to sell. Once a little boy met the old man on the road trying to catch wild turkeys. The old man had a special trap, primitive device consisting of a large box closed at the top. The flap was supported by a stick, to which a string was tied. The other end of the string was held by the old man, hidden in the bushes away from the trap. The grains of corn scattered along the lane enticed turkeys to the box, which had even more of turkey delicacy inside. Once inside the trap there were enough pieces of fowl, old man tugged the cord and flap fell. Thus, the best was to pull the cord when there were as many as possible turkeys in the box.
One day the old man cheered at the sight of the twelve turkeys in his box. Suddenly one of them wandered out. “Oh, what a pity I didn’t pull the cord, when there were twelve” – thought the old man. “I’ll wait a minute, maybe this twelfth will get back.” But while waiting for the return of the twelfth turkey, the other two wandered away from the box . “I should have settled for eleven” he said. “As soon as I get another one back, I’ll pull the cord.” Unfortunately, the next three turkeys came out of the trap. The old man was still waiting. Having twelve turkeys before he could not bear the thought of returning home with less than eight. He could not abandon the thought, that one of the twelve turkeys will return. When he finally had only one bird inside the box, the old man said: “I’ll wait until he comes out, or else come in and then I’m done hunting.” Lonely turkey came out to join the others, and the old man went home empty-handed. The analogy to the behavior of ordinary stock market trader when avoiding risk and accepting risk is amazingly close.