September 28, 2007, 7:00 am

The Chinese Definition of Risk

by: The Financial Blogger    Category: Miscellaneous
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Chineese Risk

Have you ever seen this image? In Chinese, the word “risk” is represented by two symbols. One means danger and the other one means opportunity. While many North Americans tend to see only the danger in any risk, I am part the ones who look at the opportunity, maybe too much actually!

As I had previously written on this blog, I think that the risk of something is only a possibility. In fact, what matters the most is your aversion to risk and not the risk itself. And this could change from time to time as your financial situation evolves over time. When you got nothing but bad luck in life, you will probably become more risk averse than somebody else. The danger part of the risk will always be there, but it represents the worst case scenario. The other side of the coin is the opportunity.

Risk incurs rewards. This is one of the first statements you learn in finance. Wherever you may find risk, you must find a proper (potential) reward linked to it. If not, it’s not worth it. So my perception of risk would go more like this: “Will I be sufficiently rewarded for the risk I am taking?”. You can also ask yourself what is the worst case scenario versus the best case scenario and compare both of them.

I previously wrote about how I lost 4K at the age of 23 (it was 50% of my investment portfolio at that time). However, while the worst case scenario was to loose that 4K, the best one was showing a potential reward was about 100K. In fact, I had my eyes on to mining company. I decided to put all my money on a single stock as I had received “good information”. While my investment dropped by 50%, the other company (blue pearl mining back then) went from 1$ to 15$ in a few months before the name was changed for Thompson Creek Metals (TCM-T on TSX). The opportunity was much greater than the danger according to my opinion even if I ended losing money.

The great thing about this definition is that you can work on both sides of the meaning of risk to increase your yield. While improving your knowledge in what you would like to invest in (rental properties, stock market, start-ups, etc), you can reduce the danger accordingly. At the same time, you can increase your chance to get a hold of a great opportunity.

Practice is the key to manage risk. Find something you really like to invest in. It could be anything, it does not really matter. As long as you are really interested in the subject, you’ll be able to find enough energy and time to improve your knowledge and practice your art. Because managing risk is an art. Warren Buffet, Bill Gates and Madonna have something in common; they are dominant artists in their field. They learned to manage the danger included into each risk and to transform anything into a great opportunity.

The dual nature of risk makes it malleable. If you are constantly thinking about the market crashing, that you will not have enough money to retire or that you will never succeed creating your own company, you will only find the danger in risk. The human being is a very powerful creature; it has the ability to materialize its thoughts. So if you think about all the opportunity out there, you just have to pick one and go for it. Do you really think that Sergei Bryn and Larry Page thought about being crashed by Yahoo! when they created Google? They kept the danger aside and took the opportunity they were given.

Risk is everywhere and in everything. That also means that there are opportunities that lie behind each of your thoughts.

 

 

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Comments

I like this post. Many people think risk is to be avoided, or a bad word. However, as you mention, there is not much that is a sure thing so everything is risky. To me, risk just means “unforeseen” or “unforeseeable”. In the financial world risk is both about upside and downside. For example, you may have a project that doesn’t either lose 50% or gain 2500%, which carries a risk of lose. The project may instead gain 10% or 100%, which is has a big uncertainty and therefore is risky, even though there is no way to lose money.