Risks in Finance

Life is risky, investments are risky, there is uncertainty, no one can predict the future accurately and there is always that big inefficient, irrational and unpredictable beast called the government.

On page 326 of Retire Young Retire Rich by Robert Kiyosaki (part of the Rich Dad Poor Dad series) Rich Dad says “What would you do if there was no risk and it required no money to become rich?”

This question blew me away! The previous 325 pages in the book prepare you for this question. Think about it, when you come to this world you have no material possessions of any kind except your body. It doesn’t matter if you are born on a rich family because plenty of rich kids don’t make it and end up poor and it doesn’t matter if your folks were financially poor because plenty of “poor” kids make it to be mega millionaires. So obviously it takes no money to make money.

However, how about the element of risk? This was a lot harder for me to get. It took me a long time. If you look closely at how successful people operate, they operate in a world that has no risk. When they play in the market, they don’t buy shares –if you buy shares you can lose a lot, they buy call options where their losses are limited and the gains are potentially higher. When they enter into a business transactions they don’t do it unless the profits are MANY TIMES the original cost, so there is PLENTY of room for errors and even if the deal is not that good THEY STILL make a lot of money. If you read the first Donald Trump books, the ones he wrote at the end of the 1970s and beginning of the 1980s, you will see that he risked only a couple of millions if that at all, to gain hundreds of millions of dollars.

Rich people don’t go to Vegas unless they want to enjoy losing some money. They don’t go to Vegas to win, they go to Vegas to have fun and they KNOW they are going to lose, it’s just the cost of having fun. Rich people don’t take 50/50 chances, they know from the start that they have 99% chances of winning and they are thoroughly prepared for that 1%.

Rich and successful people operate in a world of measures and counter-measures, “reciprocating mirrors”, as my brother likes to call it –he is a very successful Real Estate entrepreneur. For every possible problem or risk, there is a counter measure. Let me give you an example: I have two brothers, they both make the same money, one of them is always broke, the other is always viable. One of them had to take his girlfriend’s dog to the vet and asked the other brother to borrow $400 to pay the bill. My other brother told him that that was too much since he could have done it for free! How? because he paid a $60 membership on a pet store to have free vet services for a whole year.