The measurement of investment risk is both an objective observation and a subjective opinion. The goal is to try to analyze the risk y ou are willing to take for the potential reward you hope to gain. Interestingly, in hindsight it may be that there was much higher much lower risk than you originally anticipated along with the reward being higher or lower. That is why risk management can be difficult. Information is paramount.
I analyze risk from three perspectives:
What is known?
What is unknown?
What is hidden?
THE KNOWN
Generally these are the standard risks that are usually recognized and available in media or other sources:
General business conditions Gross Domestic Product interest rates valuations
Price earnings and the ratios (Case Shiller Index) jobs climate geography taxes
Technology philosophy trends politics trends war
Most investors will be aware of these kinds of risks and their implications. These are fundamental in nature and should generally be understood by an investor.
Before I move onto the next category I need to address three concepts that can be known but maybe not in the right context or fully understood.
First, Wall Street Risk
You know that you need a broker to buy or sell financial assets. It wasn’t always that way and you need to understand the dimensions of that structure. A long time ago you could buy stock directly from a company or partner. There was some fraud and misleading information in that way. However, it is quite laughable for the government to think that mandating that process to Wall Street was an improvement. Wall Street has been the cause of many financial disasters and has often caused the losses of the investment public. Wall Street puts out a lot of information which is mostly one sided, often missing very important information. Wall Street protects itself, not the public. When you open a brokerage account if you read thru the pages you will find a clause detailing “arbitration”. It forces you to give up your normal rights under civil law and resolve problems thru the arbitration process basically controlled by Wall Street itself. If you would like to retain your legal rights they will not do business with you. So from the start you are dealing with a company working against you. Why would you take their advice in that kind of relationship? So you have to deal with them to transact securities but that should be it, no conversations. One way to address that situation is to only have important conversations and advice from fiduciaries, like me. Fiduciaries do not take away your civil rights and are obligated to advise and manage on your behalf. Now although you will be treated much more honestly and with good intentions, there can be significant differences between fiduciaries in terms of overall competency and successful results.
Second, Media Risk
You need to be careful of media and other sources of information. For example, CNBC, in reality functions as the public relations department for Wall Street. Virtually everyone associated with it and who appears on it has a financial incentive to promote Wall Street. The same is true for large corporations who distribute information. The government has permitted a wide margin to allow for insider trading and the withholding of information by both business and government. It is very important to expand your research and sources keeping in mind that there is a lot of false information floating around.
Third, Contrarian Theory
This is a fascinating subject. Our minds have been oriented to consensus. Google ratings, 4 out of 5 doctors recommend. It has become a natural thought process and it works very well, except in investing. Popularity does not always equate to real value when it comes to assets. in fact, it can often mean the opposite. As more and more people invest in something because they think it is great, it becomes overpriced and the value goes down. If you examine longer term charts, you will see big volume at the top and bottom of the price scale. It indicates the general public buying or selling at the wrong time. I can give you an example in practice. When I lecture to a class or at a seminar, if 20% of the audience likes a certain investment, I may have an interest. If 50% of the audience likes a certain investment, I will become suspicious. If 80% of the audience enthusiastically likes a certain investment, I would avoid it and if I own it, I would look to sell it. To professional investors, they call this FOMO, “fear of missing out” and they know the danger. The media plays into these circumstances and can incite the movement in either direction. Contrarian theory, Contrarian fact.
THE UNKNOWN
This is the big stuff, the nature of the universe, the cure for cancer, the complications of life on earth. This, of course, is very tricky. However, you do need to come to terms with some type of assessment, judgement, probability or just plain guess as to some future trend or event. Read, listen to experts, view Kalshi, whatever. Observe who has been consistently correct in their predictions and who has not. The point is that no decision is a decision and has consequences. You need to think about these big things as part of risk management.
THE HIDDEN
Despite the greatest volume of information in human history and the fastest dissemination network of that information in history, too often, we are still missing important information. Unlike “unknown” information, this is information known by a few who intentionally hide it from the many. This has become the most serious risk, not just for investing, but in general lifestyle. There is far too much fraud and false advertising and a lack of disclosure and transparency, embedded in every sector of society. It is so bad that if everyone in government and business woke up committed to honesty, the Gross Domestic Product would significantly decline. The decline would be temporary as truth and honesty creates prosperity for all.
In investing, in every transaction, there is a buyer and a seller. Outside of personal considerations, they do not always have the same information in their respective decisions. Often investors find themselves on the wrong side of the trade and lose money. At that point, it is too late. The accurate information is now known. Most losses are the result of missing information that was in existence, just not by those who have lost. There are powerful forces at work in society that manipulate information to gain wealth. Often the victim is the public.
In lifestyle, many of the problems you encounter will be the result of missing information or information that was presented as propaganda to intentionally mislead you.
To overcome this difficulty, you need to constantly observe and study the information in the world. Pay close attention to the gap between the information presented and the actions of those providing it. In many ways your thoughts on risk and the future will come down to your belief in God and the morality that goes with that philosophy. Support those who share the belief and demonstrate it in their lives. Look out for those who do not and make sure not to support them. Demand those in positions of power to mandate disclosure and transparency. We are all in this together.
Disclose unto others, information you would want disclosed unto you.