Zen And The Art Of Risk Management | investing.com – Investing.com

Zen And The Art Of Risk Management | investing.com – Investing.com

“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.” –Seth Klarman

Growing wealth occurs over a long time horizon, including many bullish and bearish market cycles. While making the most out of bull markets is important, it is equally important to avoid letting the inevitable bear markets reverse your progress.

Making this task much more difficult are extreme market environments and inane investor beliefs at such times. When markets are frothy and grossly overvalued, greed takes over, leading to lofty performance expectations and excessive risk stances. Equally tricky is buying when fear grips the markets.

In both extremes, and all points in between, we must maintain investor Zen. The best way to accomplish such mindfulness and awareness of market surroundings is to understand the risks and rewards present in markets. Zen-like awareness allows us to run with the bulls and hide from the bears.

Measuring Risk

The price of almost every asset represents the cost to receive cash flows in the future. With equities, for instance, we are buying future earnings.

When someone buys Apple (NASDAQ:) stock, they are an owner of Apple. Like every company, public or private, Apple has options