The Nature of Risk, by Mamis
Part 2. The Nature of Risk

The need to be certain, as a way to reduce risk, can actually increase it.

Many people, because they focus on what truly can't be known for certain, opt for a model of future randomness.

Yes, some things in life are truly random. You might get hit crossing the street. But you can stop and look both ways before you step off the curb.

In the stock market risks are not random. Those who believe they are, are either lazy, ignorant, or inexperienced.

The value of analysis is to reduce risk not improve reward.

The future is not guaranteed, and all choices have a possibility of failure. However, the willingness to forecast is vital. It expresses our ability to look both ways, to be in control and yet be vulnerable.

The risk/reward ratio is meaningless with even the slightest consideration of the odds of success/failure. It is the risk itself that needs to be analyzed, not the potential reward.

In the market, information risk and price risk are often inversely correlated. If you wait till you know more, your information risk goes down, but because the market is anticipatory, by the time you are ready to act price will already have adjusted and price risk will be higher. Thus information has a negative bias against the price trend.

Time risk is also always present. It is a third factor. How long will something take to workout?