How to Measure Risk when Investing
“No-Risk no reward“. Another myth from the past. How about “the greater the risk, the greater the reward“. Here I will talk about how to measure risk when investing!
Big Risk equals Big money?
I take small risks with big rewards. So the old cliche about greater risk and greater rewards makes no sense. Therefore I’m really not sure where these cliches came from, but I guess some guy trying to part you from your money by taking huge risks.
How all investments are measured.
Risk is the key to all investments. So when financial Wall Street types talk big risk, they always equate this with a big reward. Therefore if you don’t risk your money then you’ll never make any. This is total nonsense, and the opposite is true.
In my world, I take many minor risks using small amounts of money and make very substantial returns. Therefore small $10,000 bets will often give me a $20,000 return or more in 90 days. So it doesn’t take many small bets to make a nice stack of cash by the end of the month. So these small bet risks add up to nice fat monthly rewards.
When I see a million-dollar deal I weigh the risk associated with my bet. So investing is a little like gambling except the odds are in my favor. Therefore taking big risks is a lot like taking big bets on the outcome. My big bets, $100,000 to $1,000,000 plus are relative to much bigger players. $1,000,000 to me is equal to $100,000,000 to someone else or even $1 billion. Therefore it’s relative.
Warren Buffet Bets
Warren Buffet takes 10 billion dollar bets like I take 1 million dollar bet. So his bet is based on the amount of cash he has on hand. Because if he’s sitting on 122 billion and he bets 10% of his reserve how big is his risk? Not much really. Therefore his risk is reduced based on his years of experience and his conservative position of non-leverage.
Risk and Leverage
My definition of leverage is borrowed money. So in the above example, Buffet doesn’t borrow money, he lends it at fat percentages.
The risk I take is related to the amount of leverage I use. So today I have buildings constructed for 100% cash. I use trusted family members as general contractors on this project. Therefore I borrowed no money and have zero mortgage.
Where’s my risk in the above example? In other words, this property which has been in the family for 100 years will continue paying dividends. So dividends in the form of rent, and housing for the family. So therefore I have reduced my risk.
Is all risk related to leverage?
I take measured risks without leverage. Therefore my inexperience with new partners and vendors needs to be measured and protected. Therefore I use Paypal, eBay, or Amazon when buying from a new supplier instead of wire transferring money without these platforms.
For example, yesterday’s $8500 purchase from a new vendor was protected by using eBay. If the product description is not what was purchased then I simply return the product and get my money from eBay, assuming I can’t work out an agreement with my new supplier. Therefore my risk is not related to leverage but through insurance provided by the eBay platform protecting me against this new supplier.
Risk reduction through information
My $26,000 purchase the day before is with a trusted supplier. The product arrived not as described. Therefore 50% has to be returned. I paid cash and now I’m short $14,000. So how did I protect my risk in this deal? The vendor is licensed and fears losing that license. Therefore I know the vendor will not resist because of 3 reasons
- He is afraid of losing his license for selling me an inferior product
- I’ve been a good customer for 6 years.
- Acceptance of wired funds in the act of committing fraud is a crime.
How I reduce Risk?
I reduce my risk in the above example by knowledge, information, and experience.
Firstly, I have the law on my side.
Secondly, my supplier does not want to lose his license, so the fear factor comes into play.
Thirdly, I am a good cash-paying customer, so we have a history together.
Fourthly, I will ask for a reduction in my payment, increasing the profit margin.
Lastly, my supplier doesn’t want the product back.
I know my risk before entering any transaction. Therefore I eliminate all risk if somethings goes wrong. So knowledge and experience play a key role in risk reduction. Therefore using these tools along with nonleverage brings my risk factor way down.
I never “bet the ranch” by using all my capital, but only a small portion of it. Therefore I always have ample cash reserves on hand. So I use these tools to reduce risk. I can’t have a 100% risk-free deal. Even if I buy government bonds. So deleverage, insurance, the law, knowledge, experience, and my laser-like focus combined with cash reserves reduce my risk.
In conclusion, risk-reward is an old myth statement use to scare people. I am not afraid to reduce risk. Therefore I have knowledge and information on my side along with cash reserves.
I hope now you all have an idea of how to measure risk when investing! If yes comment your opinion!
Mike Addis, Carlsbad, California