This my seventh article on the nuanced concepts of investment risk. These articles are meant for those selling and marketing life insurance products. You can read all my previous articles and more in my Blog, https://www.helpindiainsure.iistpune.in/category/finance-for-life-insurance/. Life insurance salespersons will sell ethically and correctly, if the concepts of investment risks are understood. Each of the articles so far and the subsequent ones to follow will explore the concept of investment risk in all its nuances.
We also undertake the course Finance for the Life Insurance Sales Professional (FLISP). Click on https://www.iistpune.in/finance-for-life-insurance-sales-professionals-flisp/
By definition investment risks cannot be predicted
If one is able to predict risks, then that risk itself does not exist. Risk exists only because we are unable to know for certain as to what will happen in future.
By definition investment risks cannot be predicted. Because risks cannot be predicted, luck plays an important role in the success or failure of investment decisions.
Luck and risk are siblings
Morgan Housel in his book writes, “Luck and risk are siblings”.[i] I will explain why it is so.
Most people tend to believe that a savvy investor has conquered the science behind risk management in investments. The belief assumes that savvy investors can predict such risks as
- When Donald Trump will reduce tariffs or increase tariffs and by how much
- Whether the next monsoon will be normal, deficient or excessive
- Whether inflation will rise or not
- Whether there is going to be a recession in the near future
- Whether there will be a war soon
Risks such as those mentioned above, and thousands more not mentioned, are the reasons why the future cannot be predicted.
Most people believe that knowledge and skills are the reasons for success
If you ask a fund manager for the reasons for his or her success in an investment decision, the answer you most probably will get is that it is because of skill, knowledge and a lot of experience. We tend to congratulate successful investors on these attributes.
While knowledge, skills and experience may play an important role in investment success, the credit for such success cannot be ascribed to these reasons alone.
Warren Buffet
Warren Buffet, in one of his annual speeches to the shareholders of Berkshire, mentioned that in his lifetime he probably invested in around 400 companies. Out of these, he mentioned that he was successful (by his definition) in a dozen or so companies. The most successful investor in the world was lucky in a dozen investments, and unlucky in the remaining approximately 388 companies. This is the role of luck in investments.
But no one talks of the role of luck in investments. No investor (at least the institutional investors) will mention that luck played an important role in their success. If you tell a person that luck played an important role in his or her success, you will be seen as a jealous person.
Bill Gates
Morgan Housel in his book writes about the luck in the life of Bill Gates. Bill Gates studied in a school, which was the only high school in USA to have a computer. Gates and a couple of his friends had ample opportunity to “play” with the computer. The School Principal gave them a free hand.
In 1968 when Gates got to use a computer, there were 308 million high-school-age children in the world. About 18 million lived in USA. 270,000 children lived in Washington. About 300 attended Gates’s school, Lakeside School. Now you can see how luck played a part in Bill Gates’s success.
There was approximately one in a million chance of a high school student getting a computer to learn in the world at that time. Gates was that one in a million.
Gates himself once said, “If there had been no Lakeside, there would have been no Microsoft.”
The opportunity to study at Lakeside School was luck. Lakeside School getting a computer was luck. The Principal allowing the students a free hand was luck.
Probability Theory is half a science
Investment risk calls for a deep understanding of risk. Assessing the risk is a judgement. You may be right or wrong. There is no scientific method of assessing risk. What is referred to as science in risk assessment is actually the use of probability theory. Probability theory is not science in the same way as the Laws of Motion.
Typically, using probability theory gives you statements such as: “There is 80% chance that the share price will move up by 10% in the next week.” To an investor, the statement is of no practical use. It does not answer the question: “Should one invest or not?” Will luck put me in the 80% bracket, or will I be unlucky and end up in the 20% bracket?
If you land up on the winning side you are lucky, if not you are unlucky. Knowledge and experience to some extent may help you to fine tune your decision. But that knowledge and experience cannot guarantee you will be right. That is why prudent investors minimize risks in investments.
This is what you will learn when you join the unique, tried and tested method of IIST’s Finance for Life Insurance Sales Professional (FLISP) course. Visit our https://www.iistpune.in/finance-for-life-insurance-sales-professionals-flisp/ to know how we can help.
You can also read more about these issues in my book, “Ignis Fatuus: The Delusions Created in you and for you by the Investment Sector”. Available on Amazon: https://lnkd.in/dR9yuJVQ
More insights in my next article. Look out for regular articles on the concept of risk. In the meanwhile, you may also visit the website (https://www.iistpune.in/) of The Institute of Insurance Sales Training (IIST) to know more about the number of ways we can help you reach great heights in life insurance sales team building and selling.
[i] Morgan Housel, The Psychology of Money, Jaico Publishing House, 2020