As an Investor, you NEED to understand Risk.
However, most Investors have the wrong idea of risk.
This Thread teaches you everything need to have an edge over those investorsπ
However, most Investors have the wrong idea of risk.
This Thread teaches you everything need to have an edge over those investorsπ
1. Risk in Academia
If you went to Business School, you know how they teach risk.
Risk = Volatility
It measures the range of price fluctuations over a period of time.
But this is NOT how investors should think about risk.
If you went to Business School, you know how they teach risk.
Risk = Volatility
It measures the range of price fluctuations over a period of time.
But this is NOT how investors should think about risk.
2. What is Risk?
So if volatility isn't risk, what is?
Risk is the probability of a permanent loss of capital.
Permanent loss is the primary concern every investor should be thinking about.
Now we need to figure out how to think of the probability of such permanent loss.
So if volatility isn't risk, what is?
Risk is the probability of a permanent loss of capital.
Permanent loss is the primary concern every investor should be thinking about.
Now we need to figure out how to think of the probability of such permanent loss.
3. Understanding Uncertainty
We can think about the future as a probability distribution, and we never know which outcome will occur.
We wouldnβt even know if we knew all possible outcomes and their exact probabilities.
The most unlikely things happen all the time.
We can think about the future as a probability distribution, and we never know which outcome will occur.
We wouldnβt even know if we knew all possible outcomes and their exact probabilities.
The most unlikely things happen all the time.
4. The Relationship between Risk and Return
We get taught that there's a positive relationship between risk and return.
Take more risk, and your expected return will be higher.
This is a theoretical concept that only makes sense using volatility as risk.
We get taught that there's a positive relationship between risk and return.
Take more risk, and your expected return will be higher.
This is a theoretical concept that only makes sense using volatility as risk.
Let's upgrade the graph so that the uncertainty of outcomes and the risk of losing money becomes more apparent.
The bell-shaped curves in this graph represent the uncertainty of outcomes.
The riskier, the higher the uncertainty and potential for loss.
The bell-shaped curves in this graph represent the uncertainty of outcomes.
The riskier, the higher the uncertainty and potential for loss.
5. How to Handle Risk
1. Downside Focus:
Prioritize the downside of every investment. With limited downside, the upside will take care of itself.
2. Understand Risk:
Sounds obvious, but understanding risk, which you do know, automatically helps to avoid it.
1. Downside Focus:
Prioritize the downside of every investment. With limited downside, the upside will take care of itself.
2. Understand Risk:
Sounds obvious, but understanding risk, which you do know, automatically helps to avoid it.
That's it for today!
If you have 3 more minutes, you'll learn a lot more in my free, more detailed article (link in bio).
Please also Like and Retweet this Thread so more people can see it!
Follow me @MnkeDaniel to learn more about Investing.
Have a great day!
If you have 3 more minutes, you'll learn a lot more in my free, more detailed article (link in bio).
Please also Like and Retweet this Thread so more people can see it!
Follow me @MnkeDaniel to learn more about Investing.
Have a great day!
Learn more about Risk in this article on my Website:
danielmnke.com
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danielmnke.com
On my Website you also find:
- 10.000 pages of free Investing Resources by the greatest Investors
- A Bookshelf with inspiration for new books
- A Thread Archive
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