Risk, Risk Pyramid, & Strategical Thinking about Them Risk and Reward We all take risks in the stock market. In fact, great things are often accomplished by taking risks. However the risks must be managed toughly in the war place like market. To most of us, it is true that the higher the risk, the higher the possible return. But it is too general with too many rooms for anyone to put some biases into it. We could not identify the value, the margin of safety corresponding to what we have paid. The fact is in the market nothing could be always very expensive and extremely cheap. We don't know when and why the things could be bought cheaply! We don't know how to define a thing is cheap or expensive. We have not been trained to calculate the value accurately enough or at least not absolutely wrong. We focus on the high return but we don't know when we could buy so that we could get the risks affordable and be sure our portfolio is never in losses! We could not understand when the high risk thing could becomes low risk and how to increase the probability for good enough return. We don't understand that without matter how hard we try, we still have the probability to lose or lose all in in the market. So most of us take the risk we could not understand and sell the chances at discount we could not understand too. The stock market seems the place for people to burn the money! Popular views and uniqueness The chart above shows the most popular point of view about the risks in the stock market or any market where people could trade or invest. This so called risk profile is based on a wrong definition, that is the volatility is risk. However risk is the chances you lose the money under any conditions. The more chance you lose unaffordable money the higher you risk your capital. Volatility itself could not make anyone, who stay away from the market, lose the money. It always depends on what your buying price is, what the margin of safety of your buying is, what the selling price is, what your cash reserve is, and what cause the volatility. It oversimplifies what is risk and how to manage the risk for your direct and indirect profit goal for your business. Most of market players or investors don't have business senses, don't have their own market views or have wrong ones(I am one of them so far); they don't know what position at what time has high probability to win out: it is about time, quality, price, personal traits; they always expect too much and hope little in the time they should not; and they don't have plan B to deal with the unprecedented events and the losses due to human errors. We know we all have labor value. We know we should be businesslike investor. We know we have to be unique to service the market warriors. What's the volatility to wise market players and warriors? Volatility could be disasters to the warriors but it could be your friends to reduce the risks to affordable level for each buying and no losses to your business or portfolio! Have you put enough effort to increase your labor value in the market as you did for your career in the offices? Few of market players could say yes! As a businessman to service the warriors, you need to know what the warriors want and when they want; you need to buy what they want at the lowest price or reasonable price in the bottom channel which is much lower than their value and form the necessary margin of safety for your buying. You should know the volatility, buy at the price which much lower than the value, sell when the price swing back to the value or in the way towards to the bullish peak, and have cash reserve to avoid the sale on fire. Risks from the uniqueness We need to act uniquely which will separate us from market warriors. However we have to know uniqueness is few always. When we look for uniqueness for our business, we could make mistakes. There are risks to lose the money even we believe we are unique. I became over-confident since last October. I made a series of mistakes. All of our losses have seeds when we feel extremely good or hope more than the market and our capability allow. Each elements of the uniqueness has its own catches! Lowest price is great but it could be false one or the market could push the price much lower than your assumed lowest price or the market could extend the sale seasons with different reasons or you buy some falling knifes since their bad qualities. All of judgment have some assumption. Our assumption could be wrong. What can we do for these catches? We usually don't assume anythings could result in our losses. Most of time we are wrong or sooner or later we would find some assumptions are wrong. Since 2004 I always want to get high return with low risk or no lose to my portfolio at all; I always want my buying price to be much lower than the value; and I always want to keep the cash reserve big enough. However my mind just became hot and all of rules and guidelines gone. Uniqueness is great and could help you make some profit but the profit could lead your head into the bathroom and open the tap to fill your head with the water. Once this happen, you could put you at very risky position with the believe you are unique and market is in your hand until too late and the losses is too big. We need the road map and a plan to make our head cool after some big winning. In my view, I believe risk is our ignorance and arrogance, which would result in over-optimism, exciting, thrilling, and euphoria. Who would worry about the risks to lose money when we are enjoying the music in a grand party euphorically? It is your job, your business, and the market is not place for you to enjoy the party! You have to do your job. You have to know business is always business. Don't tell me it is someone else trap you there. Don't tell me the volatility increase the risks. Don't forget we are the people have to take the consequences if we make any mistakes in the market. Don't forget it is impossible we would never make mistakes in the market. Don't forget if you are too happy, you need to be alerted by the catches. Don't forget personal behaviors only could be changed after this behavior is ingrained into your blood. Popularity and uniqueness Don't ignore the chart above. It is popular among the market warriors and mediocre businesses in the stock market. We need to find when they are aggressive and when they are conservative. We need to find when the quality is assumed as rubbish or rubbish is assumed as gems by them. Why do we want a business plan? We want to be unique in the market or at least in our own circles and be alerted by the corresponding catches. We like the risks when everyone cries for them. We hate the high return when everyone sings for them! Why? Your business is a service one for warriors. It is your job to cure their pains to buy what they want to throw away desperately. It is your job to satisfy their euphoria to sell the ticket of the party. Don't forget your job and your responsibility if you want to open this service business. Don't forget giving what they want. You could not change your customers and you could not become part of them as I did since April 2011. We need our plan to identify their needs and stop us to be part of them. We don't look down them. We just want to do our job and realize our labor value. They could go back to their offices and workshop, but we could not after we open the business even it is probable we may fail in our business but the consequences would be much worse than our expectation. We have to control the time and position for what we want; we have to invert to the opposite direction against our assumption and guess; so we could put the risks into the box within our sight; so we would be able to plan for our profit since no loss to worry; we have to keep our cash reserve to buffer our mistakes to calculate the probability. If we don't give up and would like to realize the value and see our margin of safety becomes the profit, we must be patient to wait. We must know we could be wrong and the probability we are wrong is quite high before we have the proper behavior in the market. We need some ways to protect us when we are wrong. Please understand diversification and time average are not to filter the risks that make all of warriors lose their shirts. We are little boys who run a little Casino houses to entertain the market warriors. We have to calculate the winning probability, do all to increase our winning probability, and prepare to protect the damages from our honest mistakes when we calculate the winning probability. We don't win over anyone else but ourselves. We want to give out our best service! Are we qualified?