Today, I’m happy to note that I have one trait that puts me alongside entrepreneurs and big-time investors! Ironically, I’ve always been ashamed to openly acknowledge this trait:
SEVERELY RISK AVERSE.
It’s funny, though, that we hold an open consensus that risk taking behaviour is the defining characteristic of such people. IT ISN’T! And according to Mark Tier in his book The Winning Investment Habits of Warren Buffett and George Soros, adopting their number 1 mindset of NOT LOSING MONEY might be your first step to making money, consistently and substantially.
The thing is, many of us are mistaken because these entrepreneurs often LOOK like they are taking a lot of risk. But one thing we have to grasp is our misunderstanding of the nature of risks. Number 1: risk is subjective. What is risky to a circus troupe performer on a tightrope is vastly different from what’s risky to an average person with two left feet. An activity repeated over time increases experience, accuracy of performance and judgment, and therefore reduces risk. When experienced businessmen make split second decisions in arenas they are familiar with, they are in fact very much in control of the situation. Knowing what they are doing makes the difference between the percentage risk when they do it and when we do it. When we’ve learnt enough to be on par with them, we can talk.
Number 2: risk is manageable. They know this and they know how to do it. Investment ‘gurus’ tell you when times are bad, shift your portfolio to low risk stocks. But the real investors know there is a third option. DON’T INVEST. That’s risk FREE.
When you know how to manage risk, risk profile becomes a laughable concept. They simply don’t take risks. But of course, put that down in your securities application and you won’t even be granted an opportunity to trade.
Meanwhile, before I learn enough to ‘take risks’, I’m drilling these rules into my head:
1. “The market is always wrong.” -Buffett. Develop your own (internally coherent) philosophy about the market and invest based on these criteria, unemotionally and systematically. Don’t try to predict the market or listen to it.
2. If there are gurus who can teach you surefire methods to making money, they’re more likely anonymous hermits quietly sweeping away tidy heaps of winnings than dynamic, glib-tongued marketers promoting accurate softwares to predict trends or ‘get your money back!’.
3. “With enough inside information and a million dollars, you can go broke in a year.” -Buffett
4. Don’t diversify (too much). “What’s important is not whether you’re right or wrong about the market. What’s important is how much money you make when you’re right about a trade and how much money you lose when you’re wrong.” -Soros
5. “Investing rule no. 1: Never lose money. Investing rule no. 2: Never forget rule no. 1” -Buffett