The Nature of Risk

[MadMarketScientist 11]

A veteran Wall Streeter, Mamis argued for technical (as opposed to fundamental) analysis of stock prices in When to Sell (1977) and How to Buy (1982). In the charmingly existential text at hand, however, he goes well beyond his demandingly interpretive discipline to reflect on larger issues. To achieve success in either life or the market, Mamis points out, individuals must act before they know enough, meaning there are hazards involved. He observes, for instance, that investors who hesitate may catch only the last 20% of a bull move and thus assume a disproportionate share of risk. Among other problems, the author notes, those under pressure (i.e., at risk) often let emotion determine their responses. Since experience instills concern as well as confidence, he says, many people (having been coerced into socially acceptable behavior patterns since childhood) become paralyzed at critical junctures in their personal and financial lives. Taking as a given the premise that ``the market climbs a wall of worry,'' Mamis advises readers to trust their intuition (not instincts) whether trading equities, falling in love, or engaging in other more or less gainful pursuits. Incurring informed risks, he asserts, can prove a liberating proposition whose reward is not necessarily a payoff, but a balance. By this, Mamis means the satisfaction that accrues from playing a game (or role) to win, rather than not to lose, from start to finish. In addition to an abundance of Zen-like pronouncements (e.g., ``death is the extreme of risk''; ``like sex, money distorts our senses''), he offers a full measure of contrarian counsel on a wealth of subjects--from gold (a commodity Mamis cites as an impotent hedge during recent market breaks) through indexing (an investment approach that reduces responsibility without curbing risk) and diversification (a system ``designed to protect the dumb''). Thought-provoking perspectives on the market and life as tests that never end

[DbPhoenix 42]

The Nature of Risk is a seminal work for anyone who understands that self-knowledge is key for success in the financial markets, particularly at market extremes.

 

Rather than babble about risk in general, Mamis takes this engine apart and examines its parts, among which are information risk and price risk. He explains that as one's tolerance for information risk increases (the need to know why the stock is doing whatever it's doing), one's price risk diminishes (one is better able to jump in and take advantage of whatever opportunities for picking up cheaper shares present themselves).

 

On the other hand, if one has no tolerance for information risk and must know everything about a stock's movement, his price risk will be that much greater because the price will likely, by then, have risen to an over-extended level.

 

Therefore, having identified these components of risk (time risk is another), one must then balance them out in order to approach the markets rationally and unemotionally.

 

An extremely important work, particularly for the investor who is plagued by doubt, confusion, and anxiety.