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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Managing Risk Date: 9/15/2012 8:29 PM
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Risk is risk, wherever it is found, and its management is always the same. You identify the events that could cause you harm, and then you put into place defenses. So let me tell a tale that seems to have little to do with investing and then tie the two together.

Weather permitting, I cycle daily, doing maybe 4,000 a year. That isn’t serious mileage. But the rides are far enough that when something happens, like a flat, it’s further than I want to walk my bike back home. So I carry basic tools, as do most riders. But today, on a country road far from any bus stop, I saw a rider ahead of me, walking her bike. From a distance, her tires looked OK. But I slowed and asked the obvious question.

“Flat tire”, she agreed.
“I’ve got a pump and patches.”
“But I don’t have any tools,” said she.
“If you’ve got a spare tube, I’ve got tire wrenches.”
“No tube”, said she, declining any help, and I rode on.

While it might be gutsy to suck up one’s obvious mistakes and keep walking, it’s not good karma. If a rider isn’t ready to accept help, then they aren’t prepared to give it, either. Worse, if a rider hasn’t anticipated something as common as a flat tire, what’s she doing way out the country? I don’t carry just a spare tube and pump. I carry two spares, plus patches, plus a backup pump, which got added to my kit when I ran across a rider whose pump failed and I had helped him. “If it happened to him,” I thought, “ it could happen to me”, and a cartridge pump got added to my kit. In other words, I carry backups to my backups.

I’d argue that the multiple layers of defense one needs in cycling are no different than what needs to be put into place in investing. It has to be assumed that one’s first line of defense can fail and maybe even one’s second line of defense. But the cost /effort of creating those defenses is generally trivial compared to the grief avoided if they’re in place when needed.

That rider was on a high-end bike and kitted out like she knew what she was doing: gloves, shoes, helmet, jersey, the works, and she admitted to riding that road before. But for failing to spend the few bucks that a tube and pump would cost, she had a long, long walk ahead of her. Same-same with investors. For failing to figure out what could harm their account and then spend the dollars and effort to create defenses, they eventually end up spending far more. Worse, once they suffer an unprepared loss or two, they generally become so skittish of risk that they fail to accept the risks (and therefore the rewards) they need to reach their goals.

How does that line go? For want of a nail a kingdom was lost.
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