No risk, no gain

Updated: Dec 29, 2019


He who is not courageous enough to take risks will accomplish nothing in life - Muhammad Ali

Risks are present everywhere. We take risks in our actions every day, knowingly or unknowingly. The casino profits based on risks. Insurance firms use risk transfer business model to generate investment cash flow. There’s even a board game called “risk”.

Interestingly, your very existence is a form of risk. When you are in the womb ready to be delivered into the world, think about the risks your mother is enduring. I hope the risk was worth it. =)


Listed below are hidden risks that we may not have noticed in our lives.

  • Switching off the alarm clock in the morning to snooze

  • Not bringing an umbrella out in Singapore

  • Choosing to eat McSpicy at MacDonald's

  • Believe how much the “Cai fan” (mixed rice) stall charges your meal

  • Using Samsung Note (I own a Note 8)

  • Striking a conversation with your crush for the first time

As you grow up and start to be presented with important decisions in life. Below are some examples.

  • Choosing your tertiary education

  • Selecting your career

  • Picking your future spouse

  • Buying your property

  • Building a family and having kids

  • Investing

Why do decisions in the second list feels riskier? That’s because these decisions require a longer-term commitment and can cause significant impact to the comfort of our lives in the future if the wrong decisions were made.


Humans are naturally risk averse. Our brains are designed to protect ourselves from perceived dangers and their associated consequences. In fact, risk aversion is one of the most fundamental properties of human behaviour that has helped us survive and thrive in the animal kingdom.


Fast forward to the present, the survival instinct continues to linger at the back of our heads. Because of that, it may have unintentionally limited our risk-taking ability to achieve our desired dreams and goals in life. In today’s world, risk takers shine through. If you look at the most famous achievers in our world, many were respected because of the risks they took in fulfilling their dreams, leaving a legacy behind their name.


Examples:

  • The Wright brothers who developed and flew the first plane in 1908.

  • Neil Armstrong braved the 240,000-mile spaceflight to take the first steps on moon in 1969.

  • Bill Gates dropped out of Harvard University in 1975 to co-found the now multibillion dollar, Microsoft.

  • J.K Rowling who refused to stop believing in the work she created even when she was asingle mother living on welfare and created Harry Potter.

  • Jack Ma went from working as an English teacher to an internet tycoon founding Alibaba.

These famous people made risky decisions that ordinary people wouldn’t dare do. They were fuelled by their passion to achieve their dreams despite the obstacles and judgement from others. It is that burning desire to prove to themselves and the rest of the world that their idea is going to work that drives them towards their accomplishments.


Of course, people do fail when they embark in risky business. In fact, most of risk takers who succeeded had failed spectacularly before.

Tell that to:

  • Walt Disney who was once fired from Kansas City Star because his editor felt he “lacked imaginations and had no good ideas”. He was later forced to dissolve his first animation company in Kansas City because he could not pay his rent and (reportedly) had to feed on dog food.

  • Colonel Sanders who pitched his franchise-model chicken restaurant and had 1009 people rejected him before finding success with a restaurant outside of Utah? Now we all know that as Kentucky’s Fried Chicken.

  • In Singapore’s context, how Lim Tow Yong at the age of 72 years old was declared a BANKRUPT as his company Emporium Group Holdings chalked up debts of over $100 million in the mid-1980s. Most people would have given up at the age of 72. For him, he persevered in his retail business and 10 years later, at the age of 82, he sold his 17 stores and supermarket for $4.2 million making him a millionaire again. How many of you would have given up? Not Lim Tow Yong. You may read this article for more information about this legendary Singaporean.


I am not trying to preach you to become daredevils. My objective is to instil you the concept that although we should stay safe on some aspects in life, we shall not become too comfortable in our lives that we avoid opportunities because of risks.


Nobody says this is easy. In fact, I am still on my journey of learning and adjusting to make my daily routine less comfortable. It is tough because humans are habitual creatures and our brains is going to warn us to not be crazy. On top of that, people around you will doubt you, tell you to get real, and be focused on your career. In Asian culture, your passion or dreams 不能当饭吃.


If you think you can’t make it, you are right. If you think you can, you are also right. Concepts are right only if you believe in them and the belief will influence your action. The question is what do you believe in?


Enough of that pep talk.


Today I am teaching you a risk management method that I employ in stocks trading which can also be applied in life. I implore you to take risks in life, but we should take calculated ones.


* Disclaimer: The following article is of a general nature and intended as a guide only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. With that in mind, let's begin.


Let me introduce what brokers/financial institutions I work with. They might or might not be the best, but I have done my research and am contented with how they have been serving me.

  • For US Stock Trading/ Investing & Forex: Interactive Brokers

  • For Investing in SG Stocks and REITs: Standard Chartered Brokerage

  • For backup: POEMS Philips Securities

  • For Unit Trusts: FSM Supermart

  • For Crypto-currencies: FYBSG & Binance

  • For stock charts (US): TC2000

  • For stock charts (Global): TradingView

  • For stock charts (SG): InvestingNote

  • For study of financial reports: MorningStar, Yahoo, Reuters, Nasdaq

With the above clarified, let’s go into what risk method I employ to be profitable in trading.

I believe that Risk Management is probably the most important criteria after Psychology in trading the financial markets. People often have the misconception that in order to make money in the financial markets, you need to be RIGHT all the time.


(Sadly, we are taught to think this way as we are born in a society that only emphasises on what is right. Answer rightly in examinations; write/speak in the right way; pick the right education course/ career.)


Wrong! You do not need to be right all the time to make money in the market. The way to be profitable is making sure that when you are right, you potentially win more. When you are WRONG, accept and cut losses immediately.


I present below a mathematical derivation. If anything is too complex, feel free to consult me. You can find my contact details in this blog.


I like to use the unit R to derive my percentage capital loss per trade. It helps me remove the psychological aspect of using money to gauge return. Usually, I only risk 1% of my capital per trade. So, if you are trading with $10k capital, 1 R = $100.


Example: How do you ensure that you remain profitable when you are only right 50% of the time in trading? The trick is to make sure that when you are right, you win more. In the table below, it shows that when I am right, I ensure that I win at least 1.5 R. When I lose, I cut losses quickly at 1 R.

$2,500 profits, a 25% return of your original capital. Not bad. In trading, the objective is not to be always right (that’s why trading is not for the perfectionist). The objective is to be profitable.


Of course, the observant ones will ask me “how do I ensure that when I win, I can get 1.5 R but when I lose I only limit myself to 1 R”. I will leave this discussion to another day as this encompasses my trading strategy. (If I write everything in this article, the pages may add up to a full book chapter).

The point is that trading is a game of probability. To win, one needs to be have an advantage in the market and operate like a casino such that the odds will lie in your favour in the long run. One needs to believe strongly in his system and follow it with strict discipline. That’s why I say in trading, psychology plays the most important role. For example, are you discipline enough to accept and cut losses? Are you diligent enough to identify 100 trade opportunities? Are you willing to take profits at 1.5 R and not be greedy for more? Are you able to withstand losing streaks?


Losing streaks occurs when you are trading with such a system. Most people give up when they are not emotionally strong enough to bear the consecutive losing streaks that will cause a dent in their trading account. Even worse, some risk too much of capital per trade such that when there is a losing streak and a capital draw down, they could not recover after that.

Therefore, trading is a long-term game that requires a lot of hard work, dedication and the passion to prove that the system probability works in the long run. Most successful traders do have their bad days, but that do not stop them. They learn from their losing experiences, believe strongly in themselves and focus on the end goals.


Trading is very much like life. People give up on their passion after facing a drawback and suffer from poor decisions made without calculating risks. Some would rather avoid pursuing their dreams altogether because they are afraid to be wrong. They do not realise that even if they fail, the learning lessons from the failure might be even more rewarding. I believe this can be applied to other aspect such as confessing your love to your crush, becoming an entrepreneur, pursuing your passion, jumping ship to the next better career etc.


As for me, I make sure that I follow the same risk reward ratio for trading as per all my life decisions. Questions I will ask myself is, how much will I lose if I fail in this pursuit, and how much more can I stand to gain if I persevere in it.


To end my article, I quote from Mark Zuckerberg, the founder of Facebook.

The biggest risk is not taking any risk... In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks. - Mark Zuckerberg

I hope you learn something today. Off to my holidays in Krabi =)

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