could you give me your thoughts on risk? I was just reading a blog on Ford that was along the lines of: "this stock is heading to $1"; "the only thing that will save F is a buyout...", etc. and I started thinking that maybe my optimism for F's future was misplaced...I was thinking $10...but $1??? So immediately my feeling of risk (in the sense of: the possibility of a negative outcome) went up...Perhaps the mistake was (after making a decision) was to continue to consider other opinions? But if eliminating one risk (stock price decline) just exposes another (inflation reducing the value of my safe gov't bonds) then where is the good night's sleep in this sea of uncertainty.
I replied:
My only comment right now on risk has something to do with this...
trust the reasons, not the rationalizations. it's like simple-math. if each step is correct, the outcome is correct, even if the outcome doesn't *seem* correct. Plus, it's the times when the outcome seems wrong but isn't, that the biggest gains can be found (because others will probably hesitate and miss out).
drawing a conclusion and then rationalizing is fantasy/fear land. rationalizations may miraculously work some of the time, but if this is all you're doing, you might as well just go play the slot machines or the lottery.
the fun part of the investment game is not going with the obvious 'this just seems right' logic, but by reasoning through how things must work, and trusting an action that others may find to be crazy. It's like stepping off a cliff when you've already calculated that at a particular moment/place a hover-craft will be there to catch you. Others (cowering far from the edge), see you stepping off and are like, "no no! what are you doing! you're crazy!" but you'll know that you calculated everything right, so you'll step off anyway and get the big payoff of looking like the smartest person alive. (or the richest, if you're playing in the market)
granted, even when you do your homework, you can be wrong. but if you don't even try...you're not even playing.
plus you don't have to be right all the time, just right more times than you're wrong.
The reader's response:
Your points are persuasive...the more I try to avoid any risk the more risks pop up with their causal chains ending right in my fallout shelter...one of the challenges post-Enron (where a lot of people didn't see the implosion coming) is to just keep refining the models to include any new info...rather than giving up on modeling and succumbing to fate/superstition (the lottery) as the primary risk management tool. I've been feeling that fear/greed pattern (standing on the cliff but oscillating between go/no go) with respect to my TSP...so I feel saner now as I just changed the allocation of my TSP from 100% Treasuries back to 50% govt securities/50% International Fund (EFA) where it had been from Nov-Feb...
Hope your TSP is treating you well!
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