Sunday, July 17, 2005

Risk

There is an interesting exchange below in the comments section of my Scorecard post about risk. My last contribution to the subject was an admission that I don't know what risk is anymore. And I'm not just talking about risk in the markets, either. A few of you who know a little about my personal life, understand what I am referring to here. Whereas risk used to be the guiding light of measured action, at some point after turning 55 (a Fibonacci number) risk ceased to be a factor in my life.

My Macintosh widget tool defines risk as a noun, "a situation involving exposure to danger." Maybe more illuminating, if I click the widget for it's thesaurus, it generates risk synonyms, "chance, uncertainty, unpredictability, precariousness, instability, insecurity and perilousness." Yes, as Jon Lovitz used to exclaim on Saturday Night Live, "That's the ticket."

In the markets, as in life, there is always the safe way, with limited, knowable, returns and there is always the risky path, with unlimited, unknowable consequences. What is it that causes one in the prime of his life to choose risk? Or is risk simply a continuum upon which we slide from one end to the other, using degrees of desperation as our only directional tool? In the thread below, my protagonist re risk is Ross, a friend of mine for the past 20 years. Ross, an MD, has built an incredible medical business and I was there when it all began. Every step of the way for Ross was steep in risk. Now, twenty years later, tremendously successful, Ross worries about stock risk inherent using insider buys as a sole determinant in investment decisions. Is the nature of that risk so different as the risk Ross took in starting his own medical business so many years ago?

What is the nature of risk, how do we assign value, input, significance to risk in walking through the markets, our lives, our dreams? Is there some objective measure by which we can utilize risk in the decision making process? Or is risk just some subjective cloud of uncertainty, ever-present in the smallest to the largest of our daily life decisions?

A lot of question marks today. I just don't have any answers. One year ago I left what was familiar, what was my life, on a journey that took me to the Pacific Northwest to daytrade stocks for a private hedge fund. The risk I took, the cost I have paid and the new life I have found, just doesn't lend itself to any rational analysis. Fifty-five years (a Fibonacci number) and longing took over. Go figure.

A

3 comments:

Ronny said...

Allan,I guess we all have to define risk for ourselves. You can never totally eliminate it from the markets or life for that matter,but with increased risk comes the potential for great rewards.When I took on more risk in the past 8 months (in my trading),I have done much better.Who knows if this will continue,but I will try to manage the risk to some extent and let the chips fall where they may.
Ronny

Greg Reiman said...

Hi Allan:

For too long, I, along with many other people, thought the long term buy and hold em strategy was less risky. I paid a steep price in real life tuition to be dissuaded of that false assumption. It appears to me that short term traders spend much more of their time in cash then in the market. By definition, day traders end their day flat (in cash) and sleep well at night (or in Allan's case, "Party on Garth") without a worry about what tomorrow may bring. Swing traders and other shorter term traders likewise are in cash as often as in the market. I try to trade on the intermediate term trends and find myself moving back to cash more often and in a larger percentage of my total portfolio. As of today I am back to about 2/3 cash position and may go to more cash yet this week. I spent most of the winter and early spring in mostly cash, I jumped in in the spring and am in the process of exiting those trades (only two left on the table). I am up about 15% for my efforts. I feel like I am managing my risk better then I have in the past. Cash is OK!

Greg Reiman

Anonymous said...

Allan,

Thank you for your kind words.

The medical business I started many years ago initially had zero financial risk. Had you been privy to my bank statements (or stock price), it would have had a multiple similiar to a utility company; only with 35% margins and no debt.

The past 5 years have been a very different story however. The risk and reward equation has changed dramatically. I have survived the bankruptcy of two of our client hospitals. In addition, in 2003 our malpractice company went into receivership (bankruptcy in the insurance world) leaving us with untold amounts of uncovered liability. The irony is that I have never done so well financailly as the reward has been nothing less than incredible.

For me, its time to take less risk and live life a bit better. As one of my doctors often reminds me, this ain't no dress rehearal.

Ross