CHAPTER 13 I Don’t Want No Stinkin’ Risk

Most of us would rather discuss profits than risk. Have you noticed that the financial news on television is filled with people discussing how high a stock will go and not how much risk it has? Wouldn’t you be more willing to tune in to a show that was explaining why gold will go to $2,000 by the end of the year, and not to someone discussing the chance of Apple losing 25% of its value?

Risk is just not as exciting as trying to make the big hit. You want to know if you should buy oil at $50 before it goes back to $90 or $120. Of course, that’s a mistake because you can’t capture the big profit without knowing the risk. The talking heads on television continue to say that, “If you had held your positions through the 2008 financial crisis, you would have made it all back, and more.” Right. But not many people did that because, when you see your retirement account drop to half its value, or more, you want out before it goes to zero. That’s what happens in a financial crisis—people panic. In truth, it’s difficult to be rational when prices have dropped by 50%.

In early 2000 when the Internet bubble peaked, there were a lot of traders who entered NASDAQ stocks late in the 1990s because it seemed as though prices would never stop going up (see Figure 13.1). When the decline started, many, if not most, financial advisers said, “Stay with it, it’s just a correction.” When the index had dropped 50%, they said, “We expect prices to stabilize ...

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