June 26, 2017

Risk management: Art of Living for another day ... by Manish Dhawan

So… What is Risk management ?

Cutting to the chase, in very simple terms, I define Risk Management as a plan to ensure that I live to see another day. That is it. That is all there is to it. If the worse that can happen, does not kill you, rest of it would be only the upside.
What is an Uncle Point?
A point at which your losses mount to such a level that you psychologically give up and walk out. Your uncle point can be a lot different from what you presume it to be. It all depends on how well you know yourself. I know a lot of people who claimed would be OK to see their portfolio go down 60-70% as they are LONG term investors, but ended up selling their entire portfolio in February 2016, which was just a 20-30% fall. It is a lot easier to shoot a tiger in a video game, in reality when a Tiger shows up, you wet your pants on his roar only, leave alone his attack.
Leverage

So Warren says, if you are slightly above average, as long as you don’t blow up, you are bound to grow Rich, such is the nature of the markets, such is the upward bias. Just don’t BLOW UP.
There is no reason for an intelligent person to use leverage as he will get rich anyways, and if you are not intelligent god forbid, leverage is the last thing you need.
So how do you ensure that you do not BLOW UP !!
Warren Buffet claims Risk is in NOT KNOWING what you are doing. No amount of diversification would help if you are shooting in the air. And on the other hand, if you know what you are doing, diversification is just plain stupidity.

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