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How Take Calculated (Unfoolish) Risks – Mangun(2-min read)

An interesting article written by Sir Mangun in BusinessMirror talks about taking risks and how foolish (if ever) it gets. Read the full article here. You can also visit his site mangunonmarkets for more interesting insights.

Similarly, I have mentioned that life is in fact a risk. That we cannot eliminate it, yet we can reduce it and take calculated risks depending on our risk appetite.


Amount vs Probability

We need to be wise in taking risks. In his article, he encourages us to focus, not on the amount to be gained, but on the probability of gain, no matter how small. He says, 

It is not about the amount of the potential loss/risk or the size of the potential reward that matters. It is about the probability of incurring the risk as against the probability of gaining the reward.(Mangun)”

Sometimes we get caught up with the dazzling outrageous “potential” rewards even if chances of winning is next to nil. Such as in the Lottery. More and more people, sometimes including me, get attracted and bet on tickets once the  6/49 pot reaches PHP100+ MM even if chance of winning is even smaller than the chance of being struck by a lightning. 

Why not bet on smaller games with less winning combinations, but with definitely lower pot money. Hey, higher chance of winning a PHP16M pot than next to nil chance of winning PHP100+MM is not bad at all right? I’d rather have some part of that PHP16M than always losing on my PHP100+M bet. But if it was Mangun, maybe he’ll say that it is still a bad bet. A foolish risk haha!

 
Patience, Appetite and Horizon
Know your investment horizon and risk appetite. Are you okay with that small chance of winning? When will you need the money, should it come? How long can you wait, because winning in lotto and in stocks were never guaranteed. We want quick money, quick fix. That’s why many get duped in investment scams even if it is too good to be true — easy money. But as they say, nothing worth having comes too easily.
 
That’s why I don’t really speculate in stocks. Because I don’t know my chance of winning. Rumors may abound telling me how much the stock price may increase, but as long as I don’t know what the chances of it being true are, of it indeed rising than falling, then I’m not sold on it. Instead, we should invest in good companies.
 
But that’s just me. How about you?
 
Taking risks is not necessarily foolish because one way or another we will have to take risks. But it’s our choice whether to be foolish or to be wise with the risks we take.

“I am happy to put up 1 million to gain 100,000 if the odds are 95 percent in my favor. I am not willing to buy a P10 lotto ticket to win P10 million because the odds are greater than a million to one against me. Both the successful stock and poker players understand this concept. That is why they are the winners. (Mangun)”

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