RISK AVERSION VS CALCULATED RISK
In the early days, when civilization was yet to develop. Human beings lived as nomads, they had to fight animals for their food, so they had an instinct to be risk takers Human Mind, as soon as civilizations started got tamed and started focusing on avoiding risks. The general public of today have a bad feeling when they hear the term risk. All they want are comfortable, safe and risk-free ventures. This mentality can also be seen in their investment as well as trading activities. People tend to be afraid or rather it should be said, people are wired in a way to run as far as possible from Risks.
All of us take risks, even without understanding it. Imagine a grocery shop, can it be 100% sure of a certain number of sales daily? Won’t they have bad days? Or Are these shops isolated completely from risks arising from external factors? Even a factor like Climate can impact the daily sales figures of a grocery shop.
But I have never seen some afraid to open a grocery shop. Why? Because they know that they can have a few bad days, which will more than be compensated by the number of good days. They know they can be profitable as they know their business fully well.
The Same can be said about stock market trading, even better, Regulator and participant level risk management systems are there to reduce risks of investors. Many factors like circuit limits, stop loss orders can help to minimize risks. Many people still stay away from markets as they don’t understand what is happening in stock markets. They fail to understand that stock markets and stock trading are so very important. In recent times, many CEOs have opted for stock price-based compensations, popular names like Elon musk and Tim cook have pocketed humongous amount of wealth in the form of respective equities. The greatest risk common public take is not being aware of how stock markets can impact their daily lives. Once they understand, they will flock to the markets.
We are intelligent enough to understand that good returns are often associated with great risks. But some risks do sound outrageous at the outset. Imagine someone offering to give double the return on your investments. What happens? Most of us would be lured in by the offer. But is it technically possible?
- Banks offer a return of 4-6% on our investments. So it is technically impossible to give 100% return on investments, not even in 10 years. A well know financial institution gave 14% ROI on their assets which was said to be the best in the industry. How to take calculated risks?
- Todays world requires one to take calculated risks, we see in front of our eyes the impact of calculated risks taken by genius minds. Who would have thought we can go on a trip to space? It is a reality now because of the risk, calculated as per space X’s level. All of us have a certain financial potential, by effectively harnessing them, we can see great returns.
- We should be aware of our capacity. It is not advised to invest/ trade beyond our means.
- Use a proper risk to reward, find setups which offer 1.2 to 1.5 times risks as reward, the key here is consistency.
- Know technically well that what you are doing is right. All you do without understanding is risk.
- Be oriented on the process, not on results, for improvement in process can lead to improvement in results.