Tag Archives: #RiskReward

Risk vs Reward

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Hey.

I am not ashamed…

…of being fully invested…

…in equity.

Yeah. That’s the status.

Invested. Fully. In equity.

Dangerous?

Sure.

So is driving.

Flying.

Cycling.

Living.

It’s about first digesting the dangers mentally, and then acting.

So, what are the dangers?

Loss.

Hmmm. Notional loss at best. So’s that of one’s house, when its value goes down in price.

Notional.

Since requirement is a very small fraction of corpus, it can be pulled from corpus, when it surfaces.

What will be pulled?

Chunk or the whole of a loser.

Loser’s liquidation will fund expenses.

Any accrued income will go into creating future winners.

Good money chases good outcomes.

Bad money finances expenses.

Nothing stays loose in the bank.

Fixed deposits are passé composé. Baby.

A). Our currency depreciates by the day, geo-politically.

B). Inflation eats into FDs daily, as sure as a shot.

C). Why be subject to this double whammy?

Is being down 50%, or 70%, or 90% in stocks — even the overhang of such a possibility — a better outcome, you ask.

Well, it can happen, I’ll give you that.

In fact, every stock quoted will be down 50%+ once every 5-7 years, on average.

With such scenario, how can I sleep at night, you ask.

It’s ok. I sleep well.

You see, I’ve not pickled the funds away blindly.

Quality companies with shareholder-friendly managements. Impeccable balance-sheets. Minimal debt. Value. Growth at reasonable price. Higher growth at representable price. Some punts, yes, with very high growth at unreasonable price, but that’s what one pays for very high growth. This will yield results. Over time. That’s why I sleep…

…well.

What’s the max I can lose?

100%.

Correct. For max loss to happen, planet needs to be going down. In that scenario, stocks won’t be our worry.

Reasonable number?

A 50-75% max notional loss is always on the cards, temporarily, with the world on tenterhooks all the time.

Temporarily is the key word.

Growth markets swallow hiccups–fast. And, I’m invested 100% in a growth market. With hiccups. (Where are there no hiccups?) Soon to be a high-growth market. Watch.

What’s the max profit I can make, let’s try and answer that.

Do we even have a number here?

I don’t.

A Little Bit of Manual is a Good Thing

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Sure.

Auto is the motto.

Keep some pivotal stuff on manual, though.

It’ll give you something to do.

Because it’s pivotal stuff, it decides direction, or quantum, or what have you.

Position-sizing is ideally done on auto.

You can write an algorithm for it too.

Yeah.

You can take auto to the nth level and then some.

Keeping position-sizing on manual, though, for example, makes you remain in touch with portfolio expansion or contraction. Central.

In my opinion, setting risk:reward is a trade to trade thing, and depends upon the underlying chart. Hence, being manual here gives more dexterity.

Same goes for setting stop-losses.

Which auto strategy to look at, when, is by default a manual thing. It should be, anyways, in my opinion.

This adds spontaneity to life.

Spontaneity has a certain freshness to it which makes work fun.

Some strategies are better off when not looked at for days.

Manual helps here.

When an auto strategy stops working, one needs to manually fit it to work again.

If the strategy needs dumping, you’ll need to see to this yourself.

Creation of a new strategy – you got it – manual.

The manual stuff keeps you moving, and fit.

The auto stuff just goes on auto, and if that’s all there is for you, you’re going to start getting lazy.

Befriend manual, but don’t become a slave to manual.

A little bit of manual is a good thing.