Risk
Risk is Everywhere
Four Pillars to Rapid Wealth Generation
Book Recommendation
From the Financial Glossary
Quote from the Wise

A simple four letter word that dictates our actions and reactions in almost every known human endeavor!

Whether you are driving to work every day, or taking a business trip in a plane, or making an investment decision worth millions - risk is the underlying, often unspoken, constant.

Today, a multi-billion (or is that trillion?) dollar industry exists around the "determination of risk". The entire insurance industry runs on its ability to predict this single factor. The banking industry makes loans every day based on its risk-assessment of the situation. Nations go to war after careful risk assessment. Even your everyday, regular, families make big item purchases only after an intuitive risk-assessment of the purchase item (Can I return it? How long will it last? and so on).

So, what is risk?

The Webster dictionary defines this as: possibility of loss or injury.

What that simple definition tells us is that we are looking to always minimize risk. In other words, our question for a given situation is always two fold:

• What is the risk?
• How can we minimize it?

Answering both questions must take into account not only the actual circumstances, but also the expertise of the personnel involved.

For example, for a real-estate investor, who has been buying and selling $500,000 properties for 10 years - a new deal worth $600,000 in a hot suburb of South Florida is not a big risk. This is because this investor has possibly seen hundreds of such properties and can quickly assess whether it is a good buy or not. On the other hand, for someone who has never invested in real estate even once jumping straight into a hot property market, solely attracted by the rising property prices, is a very high risk proposition.

Risk is Everywhere

Though this may seem obvious, we see very intelligent and meticulous individuals completely ignoring this basic axiom of risk - risk is a function of circumstances and personnel involved.

The reason we often ignore this axiom is because of either:

• Greed - We get attracted to the possibility of quick riches, and of stories of others becoming rich.
• Familiarity - We hear about certain forms of investing frequently, and we start believing that we know everything about it. Stock and mutual fund investing is one such area.
• "Trusted advice" - This is the tip from a person whom we trust. The issue is not that this person is misleading us, but the fact that what may not be risky for the person giving the advice, may be too risky for us. But it is too tempting to stay away from as well. Thus both greed and trust play a role here.

Of course, risk is not limited to investing - risk is involved in career change, relocation, starting your own business and so forth. In fact, in each of these endeavors, we undergo training, counseling, talk with friends and emotionally prepare ourselves to reduce this intangible factor called risk.

The insurance industry has attempted to use elaborate mathematical models in order to make accurate predictions about an individual's risk in areas as disparate as:

• life
• driving
• disability
• health
• business

and so on. The insurance industry has profited a great deal with improved models and information available at its disposal. And then the industry is occasionally hit by what it calls as the six-sigma event (an outlier event) - like a severe hurricane season, or a major terrorist event. They have to be prepared for these.

The stock and mutual fund industry has also invested a lot of money in determining the risk involved in holding a stock. Unfortunately, most of these models are based on simple daily price variations in a stock - rather than taking into account the goals and temperament of the investor. Such analysis always remains incomplete and less than useful.

Real estate investors who need a bank loan are also thoroughly assessed by the bank to check

• credit worthiness of the investor
• past experience of the investor
• down payment by the investor
• value of the property
• age of the property
• and many other related issues

all so that a proper risk assessment may be made by the bank, and a suitable interest rate may be charged to the investor.

We will be talking more about risks and how to minimize it in your quest for financial freedom - however, we will recommend an excellent book in the Book Recommendation section of this letter for your interest.

Four Pillars to Rapid Wealth Generation

Extra Income Pillar

The recent issues of the Greenback Mentor have been all about developing your extra income and to start immediately on this process.

What we are really asking you to do is to set up your own Chihuahua enterprise which begins giving you a small amount of extra income in its first couple of years of operations. This will give you the opportunity to really expand the scope of your operations over a period of time to where this extra source of income begins putting $50,000-$100,000/year into your pocket. Reaching this point will take time - say 3-5 years - prepare suitably for this.

• Year 1: Careful planning of the area of your business
• Year 2: Preparation and launch of business
• Year 3: Making your first net-profit
• Year 4: Bringing in serious money ($20,000)
• Year 5: Expanding into the $50,000 range.

You can achieve this goal much faster as well depending how well you follow the methodologies outlined in our site for setting up your own Chihuahua enterprise! Recommendation

Book Recommendation

From the Financial Glossary

From Barron's Financial Dictionary:

Liquidity Risk: possibility that an investor will not be able to buy or sell a commodity quickly enough or in large enough quantities because buying and selling opportunities are limited.

Simplified Meaning: Let us say you purchase a house for investment purposes. A year later, you find that property prices are dropping in that area, and now you wish to sell this property. You will not find buyers at a reasonable price for this property  for they will all be waiting for prices to drop further. There just isnt enough buying and selling happening to fetch you a reasonable price. This is the liquidity risk inherent in real-estate pricing.

Quote from the Wise

All life is an experiment. -- Ralph Waldo Emerson

At all times, we appreciate your feedback on improving this journal, any experiences you wish to share, or any disagreements you may have! Mail us at: shri_ajay@characterandwealth.com or post on the forums!