Risky Business – Principle #1
RISKY BUSINESS
Principle #1 Understand Risk
As you know by now, I am not very bright – so let’s go to Webster. The definition of risk is “a situation involving exposer to danger”. Seems very generic to me but guess I can live with it. I do KNOW this for a fact – the world would be stuck in the caveman era if nobody took risks. Really think about that for a moment!! The earth would still be flat, there would be no outer space, no crossing the ocean’s, no planes, no boats, no cars, no riding horses, no skyscrapers, no internet, etc. etc.
Risk gets labeled as “bad” many times, that’s simply NOT true! First, everything has some risk to it. Second, yes, it’s possible to have too much risk. The important issue – to UNDERSTAND / KNOW the risk.
To a degree, risk really can’t be defined (because its different person to person). High risk to some – is low risk to others. Some might call risk as being stupid. Some people might say you are “sheltered” for not taking any risk. You have all kinds of risk, right. There are social risks, safety risk (life and death), mental risks, physical risks, and of course financial risks. This is a great thing because it makes us all different.
Everybody takes risks in life. You didn’t come out of the womb walking – you fell a lot! The first time you tried swimming – you sank. They put training wheels on a bicycle for a reason – it lowers the risk of falling. Taking risks can be a beautiful thing. Some people don’t ever want to fall, therefor they never get on a bike. Some people take their lumps and learn to ride a bike. Others, take it farther and learn to go off ramps, flip, and make beautiful artwork / skills.
The issue to understand is, what MAKES something risky!!! Not many people would jump from a three-story building (willingly at least). Falling through the air is not risky or going to harm you. It’s the landing that is going to put your ankles through your brain (the risk). However, many people would jump if there was a deep enough pool below. Many people would jump if there was a net / trampoline / anything to soften the landing. Some still would not jump.
In the above scenario’s you have some control over the risk. I just won’t jump. I just won’t get on a bike, etc. Sometimes you have NO control over the risk. Ex. If you live in the US then the chance of you dying by a snake bite is .000000141% (on average 5 per year). However, 60,000 citizens die each year in India from snake bites. They have more venomous snakes, they have less medical care, farther to travel for that medical care, etc. etc. Risks you don’t control.
So, let’s try and make the leap (no pun intended) to “financial risk”. I am going to give a scenario in many different forms.
A total stranger just asked if you could lend him $1000.
A friend asks you to lend them $1000 and will pay you back at 15% over 6 months.
A family member just asked if you could lend them $1000 dollars.
A total stranger just asked if you could lend him $50.
A family member just asked if you could lend them $50.
A total stranger asks for $1000 but will pay you back tomorrow $1,200 and leave you his diamond ring.
The risk in all these scenarios is the same – will I get paid back? However, the risk level is very different in all the scenarios. Understanding what makes it risky is the key! The fiscal amount, the time, how well do you know them, do I need the funds, do I gain anything. These will determine the “level” of risk.
If I asked you to put these in order of most risky to least risky – there would be many different answers. Ex. If I was a billionaire, I would give the stranger the $1000, take his ring for collateral, and hopefully gain 20% tomorrow. If I had only $5000 in savings – I wouldn’t be lending out anything to anyone. This is MY choice, to my risk comfort – there is no right or wrong. Some people will always lend to family members.
This seems sort of easy, right? Yet, thousands of people get their financial advice from social media (mainly strangers). Thousands of people buy a stock, yet they don’t know what the company does (yet alone if the company makes money, etc.). Thousands of people are buying houses unseen (I want to see the batshit crazy neighbors before hand – just saying). Thousands of people are buying cryptocurrency but don’t even understand it. Thousands of people are trading options AND don’t know what they are (or how much they can lose/or gain). Taking just a little time to do your own research, form your own opinion, and learn will at least allow you to sleep at night (instead of checking the markets every two minutes).
Notes/Clarification: First, I am a BIG believer in stocks, options, real estate, and cryptocurrency. So, I am not speaking bad about using them as a financial tool. Ex. I am a HUGE believer in crypto technology (the blockchain, permanent ledger, etc.) so I have invested about 2.4% of my portfolio. In my opinion, it is very risky. I don’t know if it’s a ponzi scheme, if the projects make money, or going to gain mass industry usage. However, the technology just might change the world.
Don’t be afraid of risk – understand the risk!! This will allow you to make decisions that you feel comfortable with. There’s a reason that more lottery tickets are bought when the pot increases. The odds get lower BUT for $2 I get a chance to win a gazillion dollars. The risk is low (only $2) and the reward is very high. The dumb ass decision is buying $10,000 dollars in tickets (not even increasing your odds by a half percentage point) for the chance to win a gazillion.
Life is a game of risk – nobody to my knowledge can see into the future. The big red bus might get you tomorrow or you might discover something nobody has seen or done before. That’s the beauty of life. Nobody is going to get it right all the time – but the people that can identify and understand some of the risks involved will make better decisions. That’s a fact!