Most of the common ideas regarding finances and investing have been created by large fund companies. Unfortunately, a number of these ideas are wrong and dangerous. For example, a common mantra is that higher than ordinary rates of return carry with them a higher probability of failure, in other words, “high risk creates high returns”.
This idea has infected common beliefs to the point where people just accept this as true. For example, Desiree commented on One Law or Many saying in part, “I can see where a person, maybe with a tolerance for risk many… don’t have, could find these ideas too restrictive.” Stephanie O also alluded to this idea saying, “Leverage brings higher risks and rewards”. I’m not picking on anybody, but using these as examples of what we’ve been brought up believing as Truth from On High.
May I ask that people take a moment to think about the “high risk = high returns” idea. Is it true, or just accepting a dumb proposition?
Question: Who in their right mind would want to increase their odds of failure, motivated by a potential of greater rewards?
Answer: Gamblers. Adrenaline junkies.
If you’re wanting to be a responsible steward over your material possessions, gambling is somewhere on the opposite end of what you want to do. (Avoiding risk is also the opposite of what you want to do.) I’ll talk about this later, but roll this idea around for a while. Putting money in the markets per conventional wisdom is speculation, not investing. And by speculation, yes, I mean gambling.
The truth about true investing (rather than speculating) has several points, but one of the governing principles that I wanted to point out here is the following:
There is no such thing as a risky investment, only risky investors. Now, I’m getting ahead of myself here, as I’ve not laid down the reasons this is true, but let’s just run with it for now.
A corollary is, good investors don’t avoid risk. Rather, they manage risk. Before they pull the trigger they create conditions to minimize negative impact of a wrong decision.
An ironic thing is that seeking security and safety is frequently highly risky.
I’ve been following this conversation with interest, but I’m done with it now because I just realized you’ve got nothing valuable to say, mostly because of this statement: “There is no such thing as a risky investment, only risky investors.”
I’ll take my paid-off house and mutual fund portfolio over this stuff any day.
Good luck with all this.
Comment by Bob — May 20, 2008 @ 3:11 pm
Hey Bob!
Stay tuned for real value creation on this blog. Just to narrow it down to one statement, which obviously you do not understand, is very short sighted.
“There is no such thing as a risky investment, only risky investors.” Now, really think about this statement.
An investment may be risky BECAUSE you don’t UNDERSTAND the investment, NOT the investment itself! Does that help? If you follow other’s leads in investing, just because they are successful, doesn’t mean you will be successful. The difference – understanding and managing the investment. Education is the key to investing, not following the leader.
If you find no value in that statement, or mine, you’ll absolutely hate this!
http://www.leapsystems.com/consumers.aspx
AND this!
http://www.killingsacredcows.com/
We’ll be waiting for your quick return as there is no short cut to education and enlightenment. You must turn your bran back on and absorb information (the value created here) like a sponge looking for water in the dessert. One sizes does not fill all but principles always rule!
Comment by brainon4u — May 20, 2008 @ 3:32 pm
It appears that I may have not taken the time to lay a good foundation. I took a second shot at it here. Perhaps somebody will find it useful.
@brainon4u: Thank you. I write ten pages where two words could suffice.
I also think that people should have some compassion for Bob. I just put him through an emotional experience by shooting one of his sacred cows right between the eyes. As you know, it’s a very uncomfortable time when ideas that we hold near to our hearts are not affirmed.
Bob’s plan for himself is smart because he’s taking action within the context of his knowledge. I hope that at some point his mind will be opened to the possibility that the magic lies with him, not the thing or person he hires. At that point the discipline he’s acquired will serve him well.
@Bob: My most sincere best wishes to you, if you decide not to come back. Thanks for reading!
Comment by thereisnodollar — May 20, 2008 @ 9:12 pm
I know you’re not picking on me, so I won’t point out that I never said high risk brings high returns. I said *leverage* amplifies both risk and return. That’s just math.
Comment by Stephanie O — May 20, 2008 @ 10:22 pm
@Stephanie O: The main thing I wanted to tackle was the more common idea, so yes, you didn’t make that statement directly. You’re right.
Though, I still disagree on one aspect. Risk is still seated in the investor, not the instrument. If all other variables are constant, then I think you’re right. However, the mere presence of leverage alters the situation, changing the other variables. Can anybody think of a situation where leverage doesn’t alter the other variables? I’m coming up blank right now. The closest I can come up with is commodity trading vs. trading stocks, though I don’t know that one would use the same exit criteria in both. I’ve (successfully) done commodity trading before (using technical analysis), but I’ve never dug into stocks enough to know if one can use the same strategies in both. Now I’m curious.
Hmm, I can also think of situations where leverage doesn’t increase risk, since not all leverage is a multiplier. Risk can go down. A person can leverage not only currency, but knowledge, relationships, skills, etc.
Wow, thanks for creating the opportunity to ponder that for a bit.
Comment by thereisnodollar — May 21, 2008 @ 12:48 am
James,
Bessy died years ago. I have no sacred cows left. Fire at will. So far you still haven’t contributed anything but platitudes. And platitudes do not a cow kill. Happy investing!
Comment by Bob — May 21, 2008 @ 6:50 am
Hey Bob, it’s me again.
Would you please take the time to read the information at the two websites I posted here?
When you do, then please return with specific questions so I may understand your paradigm.
These principles are timeless, and once you understand where our mind-set originated, it is very easy to understand why we believe what we do today. These make sense – even if they go against what you were trained, taught, and educated to believe – by public schools (me too!) and our families.
With learning basic principles and applying them to all aspects of your life, you will create the life you want! Wealth and prosperity do not necessarily equate to physical money. A kiss from a child and love from your family – those are also a type of “money”.
We want to create value which will easily lead to prosperity, if you are willing to put in the time. I don’t believe you learned to read and write, by saying, ‘gheese, that don’t make sense because am getting along fine the way I am now’. You realized the benefit, therefore, continued with the process and education.
I am inviting you to please continue the process. Turn your brain back on, and you will have that “ah hah” moment as I did over two years ago. Stepping through the looking glass feels great! And, once you do, you will wonder how you couldn’t see it before. EDUCATION, reading, listening to like-minded people will point you in the right direction.
Comment by brainon4u — May 21, 2008 @ 5:39 pm
Oh Bob, one more thought…
The biggest investment, and safest investment you will ever make, is in educating yourself. Fear of learning something new and “different” doesn’t mean it is wrong – it just means it is different for YOU!
The answer lies within yourself, once you understand the real questions.
Comment by brainon4u — May 21, 2008 @ 5:42 pm
@Bob: I would invite you to enlighten us. Using a large rubber stamp to label things generally and walking away doesn’t help me understand what is in your mind and heart. What do you mean by “platitudes” and to what are you referring? You’re rather vague.
Thanks!
Comment by thereisnodollar — May 25, 2008 @ 10:17 pm
[...] As far as paying yourself first, businesses are an excellent method to have access to pre-tax dollars, allowing one to spend before even the IRS gets a crack at the money. This must be done correctly and legitimately. Be sure to become educated on the ins and outs to avoid risk. (Remember, it’s you as the human that governs risk.) [...]
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