#08 The Trick To Risk Management

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by Mike Lally

If there is a trick to mastering risk it is in the realisation that nothing stays exactly the same for any length of time. We must realise that the regular or routine is just a temporary measure or characteristic that fits a finite set of circumstances.

These can alter significantly in the blink of an eye – any Buddhist will tell you: nothing is permanent.

We can never know all there is to know of any given situation. Uncertainties are not caused by ignorance. Uncertainty, taken in the proper perspective, adds to the challenge inherent in our daily lives. Games of chance were responsible for the development of the mathematics of probabilities.

This has not stopped the superstitions of gamblers and rampant speculators who often have more faith in their intuition than in the available facts. And many of them are proven right. Beware that chance events tend to support irrational superstitions.

We need this variety in our thinking. Traders and investors often need to think counter-intuitively to succeed. Proper analysis of risk aids and governs all market success.

It is the trader’s most valuable tool! The market refuses to be predictable and constantly evolves to form new and mysterious puzzles to stimulate our problem solving.

Without surprise and shock we wouldn’t need to manage risk. We would never need to use a stop-loss or to buy insurance. We can take more risks because we diversify.


There once was a killer that started in the Gobi desert in northern Asia.
It spread to China where it wiped out 35 million people.
From there traders carried it to Egypt.
There it killed seven thousand people every day.
Finally it reached Europe in 1347.

It became known as the Black Death.
No one knew what caused it. By 1348 it had spread through France
and Spain and reached Britain and Germany by 1349.
One person in every three died – painfully.
It was the medieval game show – pass the plague.

Fortunately we live in more salubrious times and we seem able to cope with feared would-be pandemics such as SARS and AIDS. Imagine trying to survive in a world where populations came down with such diseases!

Puts a stockmarket collapse into perspective, doesn’t it? Change is the essence of life; things that we take for granted today do not always form part of tomorrow’s landscape. We are soon to be hit with the yearly dose of the Asian flu and many of us will wonder if this next strain will be more sinister than normal.

However, it will pass and doubtlessly soon enough be forgotten as another more worrying scare emerges. IF WE LET IT! Remember that all stocks do not go up and down in lockstep, and different capital assets have different cyclical patterns. The stockmarket is infinite in its variety.

A gentle warning is not to get too caught up in moving averages, price patterns, standard deviations and big MACD’s. You need to realise an army of indicators cannot guarantee anything. It is the non-average that causes change.

If there were no uncertainty, the stockmarket would not exist. We should welcome volatility and diversity. Thank goodness inconsistency is a part of the human condition!

We need uncertainty to take up the next venture, to inspire us to great deeds, to conquer life’s challenges and to generate wealth! Remove uncertainty and you destroy free will. Say a big thank you to the bear market!


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