It’s the training, stupid! (The Financial Athlete #128)

A kung fu practitioner said to me, “For me it was all about advancing in the ranks as quickly as possible. I don’t care about that anymore. All that matters now is the training. Since I stopped concerning myself with advancing in rank, I enjoy my training a lot more, and find myself training longer and harder. The rewards will take care themselves.”

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Naive investors love to say, “The greater the risk, the greater the reward”. So, they can take on extraordinary risk in hopes of higher returns.

I am guilty for once believing this Wall Street myth of this risk/reward relationship. The first question to cross my mind with a prospective  investment in a stock was “What is the upside?” Now, the first question to pop into my mind is “Does the company have a sustainable competitive advantage?”

After a certain point, it would be more accurate to say, “The greater the risk, the greater the stupidity.” You don’t have to be stupid to make stupid investments. Smart people who invest also suffer from what I call “the tyranny of stupidity”. Smart people aren’t necessarily smart investors. Why? Smart people are more likely to be overconfident, which overrides managing risks properly. Seasoned investors know that the “bones” to investing is risk management.  As the framework of a body is held together by bones, so all investments should be held together by diligently managing risk.

Do not infer from this that managing risk is synonymous with no risk. To live life without taking any risks is hardly living. Managing risk protects you from severe losses (“taking a bath”). The first step to managing risk is to cease being obsessed with high returns, especially short and medium term returns. This will also set you free to enjoy the process of sound investing.

“Risk comes from not knowing what you’re doing.” — Warren Buffett

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