My Personal Comprehension Of Risk Versus Reward - Part I
One of the most fundamental things to think about in the investor’s mind is the concept of risk. Interestingly, it can be the biggest thing many of those investors either think about wrong or do not think about enough. So let’s think about this.
Everyone who has followed financial theory directly knows well that teeter-totter we call “risk versus reward”; even those who haven’t followed theory know it from their gut. It’s the hesitation they feel when striking a deal. The quick calculation prior to saying something profound within a group of people. It’s the scalp sweat that creeps up just before they ask their boss for a raise. It’s the pause that makes us move.
The general concept is that when you accept more risk, you gain the potential for more reward. In one simple stock trading example, we could compare Microsoft and Sun Microsystems. So, pretending that one lonely day you’re sitting there watching your portfolio and you sense something—some longing from deep within you, something is spreading slowly up from your mid-torso, this sudden urge works its way up and then out: “yaaaaaawn.”
Sitting there watching your Microsoft stock’s little nudges here, then the even smaller nudges there, while all the while some obnoxious commentator on CNN keeps saying “Sun Microsystems just soared!” has got you thinking you might want a company like some JAVA. Turns out that maybe Sun just released a report saying that they’re even closer now to not not making money. Keep watching CNN. Sometime soon they’ll be gabbing about some other company that “just crashed and burned!” So the point is clear: companies that swing on a wider range, while offering more potential reward are also more risky. Or is this always the case?
In the next few posts on this topic, I’m going to detail many of my own notions about this and other questions about risk and what it can reward you. From the way I see it, a strategy will partly emerge. A strategy that, by taking into account a dynamic market with moving parts, doesn’t have to move.
A self-adapting strategy that can be used for orientation might in some circles seem, well, kind of risky. But then again, that’s what this is all about.
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