Thursday, 9 July 2009
Risk: exposure to the consequences of uncertainty.
Using the above definition, stock market trader and entrepreneur Curtis Faith describes how he thinks about and handles risk, both in the stock market and in life. The book does not deal with the technical aspects of risk like probability and correlation. Instead it focuses of the psychological and behavioural and offers seven general rules for taking on the appropriate amount of risk: 1) overcome fear; 2) remain flexible; 3) risk the right amount; 4) prepare to be wrong and to change course; 5) actively seek reality before and especially after making a decision; 6) react quickly when reality changes; 7) focus on making the correct decision, not the outcome.
Few would dispute the list and indeed, I could only agree with it despite my own reticence to engage in active trading such as that practised by Faith. Each principle is clearly and entertainingly explained through stories and examples from the author's own experience. There are many quotes from famous people that summarize the ideas with wit and charm. The book is an enjoyable and quick read at only 200 pages.
The idea "appetizers" were excellent but I would have wanted more of the "main course", meaning direct explanations of how to shape one's own mind to properly handle risk. After explaining how fear works, it is not enough to say "just do it, be brave". There is a bit of advice - start small and work up to get familiar with how the mechanics work. But the method for dealing with the biggest and hardest fear - irrational, emotional fear that is so detrimental to investors in times of markets crashes - is only described. I hate those questionnaires which assume that a person's current risk aversion level, which is often mainly based on irrational fear, is correct and appropriate. The thesis of this book that one should embrace and welcome appropriate risk, is one with which I wholeheartedly agree. I only wish Faith had gone a little further in telling us how to overcome fear and in providing more detailed practical advice on how to achieve the other principles. There is some of it, just not enough. What we need is the equivalent of Peter Block's classic step by step guide called Flawless Consulting.
Nevertheless, I found value in the book, in particular, the reminder to continually seek confirmation that an investment decision is going the way I thought. Last Fall, for instance, I much reduced my holdings in US investments on the expectation that the US market would remain muted for years and that the US dollar would weaken against the CAD. So far, that still seems to make sense but I pay attention whenever anyone comments on the subject.
In addition, I liked the author's support of diversification to control risk and his exhortation that people should take control of their own fate and not leave things in the hands of supposed experts.
Faith also offers opinions on how the education system, corporations and governments should foster taking more risk in order to ensure continued prosperity for the USA. It's time for you to get into politics, Curtis!
My rating: 3.5 out of five stars.
Giveaway: The publisher McGraw Hill has graciously provided me with a copy of the book to give away to blog readers. If you want to be in the draw for the book, submit a comment below under a unique name (i.e. not Anonymous). The giveaway closes at midnight Thursday July 16th. I will then do a random draw and announce the winner on the blog, asking the winner to provide me with a name and mailing address by private email. The information will not be used for any other purpose. For those so inclined, say in the comment whether you think people tend to take on too little or too much risk investing.
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