Know your RISK

Courtesy Joetheitguy.com

The Poet should Prefer Probable Impossibilities to Improbable Possibilities

Every criminal takes a “Risk” knowing that there are more chances of being caught than not.
It is not the fear of being caught but the confidence of “I will never get caught” that pushes them.
The moment individuals get into a fight mode-they gain this whole “illusion of Control” which makes them believe that they know everything that can happen, can go-wrong and just go with their plan even though there are always events/happenstance beyond one’s control that can surprise “the best laid plans”.

In the famous 2001 paper on “Illusion of Control”, the authors Francesca Gino cites how pedestrians in NewYork city continue to believe that by pressing the walk button nears light signals, they can make the “walk” signal appears faster when the whole system, is computerised and none can control it.

Individuals are often thought in “self-help/motivational” programs that when the choice is “Flight/Fright/Fight, they should fight.
When we all know that “FIGHT” is not a game plan-its just a positive feeling.
Positive feelings about ability to succeed are very important, however you need much more to succeed than just a positive feeling.

Success has so many ingredients-
Knowledge;
Competence;
Discipline;
Patience;
Opportunity
so on and so forth.

Even in this limited list it is easier to Notice how few things we control.
While knowledge can be controlled, competence can’t be.
Discipline and patience are virtuous not everyone possess.
And “Opportunity” is just pure chance.

The story of Phil Hellmuth (A record 15 time world poker champion) is legendary.
Phil was known for his temperamental personality as even mentioned by his Wikipedia page.
His break-downs are available on youtube with several million views.
How then did he manage to win 15 championships in a game of pure chance.
This is the story of “discipline and behaviour control”.
The biggest factor in his success is “how he has chosen to play fewer hands -Top 10 hands only in the initial stage.
He avoids risking his entire pot at the early stage of the game

For someone who is legendary for being temperamental, the discipline in his game is a complete contradiction.
However when you are there to win, you need to play the game, you need a strategy and you need to be in the game.
No-one has won by being out of the game ever.

Risk in Investing

This gets so easily co-related to how investment decisions are taken that one feels “why am I not following it”.
In a recent interaction with the client, the crux of the discussion was “take risk-however before you do that, know your risk”.
The biggest challenge faced by individual investors can be easily summed up below:

1) Stay out to long;
2) Get in the market in “FIGHT MODE”;
3) Keep putting “good money behind Bad” in hope of recovering what’s lost

These are nothing but issues of
1) Knowledge;
2) Competence;
3) Discipline;
4) Patience;
5) Opportunity

When the market suddenly runs-up, everyone preaches “how one should have invested and should remain invested” because that’s the only way to make money, it is still driving “long-term behaviour” using short-term phenomenon.

It is always difficult to teach patience, discipline and making the opportunity rather than waiting for it or jumping at the opportunity that’s already passed (looking at past great returns to make today’s investing decisions).

It is difficult to teach patience and discipline when the advisor is “chasing short-term rewards” not aligned with “investor interest”.

Steps for the Investor to be “Disciplined” and “Control of Behaviour” :
1) Know the Risk;
2) Know your Risk-tolerance;
3) Appoint an Advisor and “Develop an Understanding that you can review”
4) Have a PLAN-Define your investment goals;
5) Define and stick to your asset-allocation;
6) Keep investing in a discipline manner-Systematic Investment Plan is a great way of discipline investing;
7) Draw money from investments per your plan;
8) Don’t be “driven by FEAR/GREED Factor;

AND REMEMBER “UNLESS INVESTING IS YOUR CORE ACTIVITY-REVIEW YOUR PORTFOLIO ONLY PERIODICALLY; IDEALLY ONCE A YEAR”

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