Risks and the Stock Markets - Part 1 of 7

My next multi-part series deals with ‘Risks and the Stock Markets – Part 1 of 5’ (not sure how many parts it will be :-)).

Every now and then I get a new prospect for my portfolio management services (through a reference) and the varied responses I get to my question ‘Why do you want to invest in stock market and it’s varied derived forms?’ are:

• I have burnt my money; want to recover some of it

• Get better returns than a fixed deposit / recurring deposit / savings deposit

• I have no other place to invest

• Other people have made money

• Am not sure what to buy

• No time to track what I have bought

One of the most important aspects of investing which people disregard is the concept of risk and the associated perception of risk.

Risk by definition is the ‘exposure to chance of injury or loss’. Humans attach various perspectives to risk and decide the quantum of risk one is willing to undertake. Unfortunately, the definition of risk also has a bias – it tends to be negative in thought.

When I was working with TCS and had to travel quite often by flight, my father used to be extremely nervous. Reason – if I could reduce the frequency of my flights, I reduce the risk of being hijacked / being in an air crash, etc. Many of you will cite the fact that air travel is the safest mode of transport but still for a parent the perecption of the risk is very different from my perception.

Similary, for every situation, the appetite for risk and the amount of loss which one is willing to suffer varies from our own social upbringing, our sense of security (job, personal, emotional, etc.) and mental accounting of the quantum of loss we are willing to take.

Food for thought – how difficult will it be for you to accept risk as a measure of gain / an opportunity; positive thinking :-)!!