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The Nature of Risk

Life is fraught with risk: Drinking coffee is risky business, and walking out your front door holds hidden dangers. This was demonstrated a few weeks ago when, according to the Washington Post, a man was killed by his coffee mug. Apparently he had stepped out for the morning paper, then tripped and fell. The mug shattered under the weight of his fall, piercing him with a fatal shard. The point of this anecdote is not to raise your safety awareness of the deadly coffee mug, or to highlight the dangers of walking with a beverage. Rather, it is a comically sad illustration of the fact that life is fraught with risk. There is no getting away from it. Life is a game of chance. We take our lives into our hands every day, whether we travel the breadth of oceans or never leave our homes.

Money is no different: Our money is at constant risk as well. For the thousands of years that government and money have co-existed, governments have been stealing from their citizens in the form of inflation. By steadily increasing the supply of money without also increasing the value, all currencies are slowly but surely being debased over time. If you had deposited a large sum into your bank account twenty years ago, then come back and found a large chunk of it gone, you would scream bloody murder. In reality, this is exactly what is happening.

No place risk-free? Money in a mattress is no good; bank accounts are not much better. There is no way to conserve against erosion without making choices, and those choices create risk. Buy a house? The house could burn down, or the real estate market could tank. Invest in your company? If the company fails, you lose your employment and your nest egg at the same time. Buy mutual funds? Pray that the empty mantra of long term works for you, and that you do not face a bear market at the age of 65.

The good news is that risk can be turned into profit. This is why the Chinese character for crisis combines the symbols of danger and opportunity. Capitalism does not work on a first come / first serve basis. It rewards those with the brains, guts and determination to find opportunity where others have overlooked it; to press on and succeed where others have fallen short and failed. Every business person is ultimately involved in the business of assessing risk. In the sense of putting capital to work in the hopes of making it grow, all businesses are the same. The right decisions lead to wealth and success; the wrong ones lead to bankruptcy and a redistribution of resources from weak hands to strong as capitalism rolls on.

Got to risk to achieve: It has been said that the amount of risk we take in life is in direct proportion to how much we want to achieve. If you want to live boldly, then you must make bold moves. If your goals are meager and few, they can be reached easily and with less risk of failure, but with greater risk of dissatisfaction once you have achieved them. One of the saddest figures is the person who burns with desire to live, but, to avoid risk, chooses to embrace fear and lives a half life instead. This person is worse off than someone who tries and fails or someone who never had any desire in the first place. Mediocrity condemns itself.

Blind versus calculated: If you study risk, you find there are two kinds, blind risk and calculated risk. The first, blind risk, is useless and a waste of time. Blind risk is the calling card of laziness, the irrational hope, something for nothing, the cold twist of fate. Blind risk is the pointless gamble, the emotional decision, the sucker play. The man who embraces blind risk demonstrates all the wisdom and intelligence of a drunk stepping into traffic.

However, calculated risk has built fortunes, nations and empires. Calculated risk and bold vision go hand in hand. To use your mind, to see the possibilities, to work things out logically, and then to move forward in strength and confidence is what places man above the animals. Calculated risk lies at the heart of every great achievement and achiever since the dawn of time.

Trend followers take calculated risks every day.

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