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The Concept of Risk

In the previous articles, we discussed about the concept of Investing as a means of putting in money with an expectation of receiving more money in the future. While discussing Investment, we touched upon the concept of time and money. We also touched upon the concept of rate of return/growth.

An important co-related concept to time, money and growth of money is the concept of risk. Risks are the chance of things not turning out the way, you expect it to me. It’s the chance of losing money instead of getting more money in the future. When you make an investment, you expect to earn money but are not guaranteed to do so (which is the risk you take in making an investment).

Essentially, Investment has 2 sides of the same coin (Risk and Reward). Reward is when are able to generate more out of your initial outlay; and risk is the potential loss of your initial outlay resulting in lower capital than before (or loss of money). 

All types of Investments are linked to this concept. Risk rears its head time and time again and is one of the concept that plays with the mind of people. It is important to understand that

“risk is something that no one can eliminate; but is something that you can minimize in whatever you do.”  

An example would be when you are riding a car, there is always a risk of an accident. You can never get eliminate that risk, whether you are riding a Tesla or a Honda Civic.

But you can choose to ride a Ferrari like a Formula 1 driver with high reward at high speeds albeit with high risk or ride a car at a speed of 150 km/hr (sure to get a speeding fine, if not cause yourself an accident – I never recommend this to anyone) on a 90km/hr road. In both of these cases, there are risks associated with it. 

But greats like Michael Schumacher are able to minimise their risk while driving a F1 through skills, experience and learning to come our unscathed each and every time. Only to be hurt while skiing (an unfortunate turn of events, pray he recovers). 

In citing these examples, there are important lessons to take note of 

  1. Risk is something that you can never eliminate
  2. Risk can be minimized
  3. Learning, Experience and Skill helps in minimising risk
  4. Higher the risk, higher the potential reward

Do take note of what I just mentioned above around the 4 specific points on Risks. One thing, you would note is the importance of learning, experience and skill – which is where most people fail at investment; because they fail to learn, fail to take the steps to experience it as they go and they fail to improve their skill in the process. 

In summary, risk is something that you will have to live with; your ability to take more risk without tripping over is directly related to your willingness to learn, experience and develop new skills.   

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