Rethinking Risk and Reward
Ever wondered what really makes a (financial) risk worth taking? Let's talk about getting to the heart of our ambitions and decisions.
A warm hello to all new readers! I’m glad you are on board.
New here? I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream. I write an algorithm that does exactly that.
Read the full story here.
Have you ever found yourself at a crossroads, torn between taking a leap or playing it safe? Let's find out more about risk and reward.
Unravel the "why" beneath our bravest choices and discover what truly makes a risk worth taking.
And how you stick to it when things get hard.
First things first. This article isn’t about formulas and numbers. It’s about the inner game we decide to master.
We’ve all heard that saying. “No risk, no reward.” Right? It’s almost like a mantra exclusively reserved for the bold and brave. You know. The folks that walk away in John Wayne style with a smoking gun to change the world.
What kicks off this whole “Yeah, it’s worth it!” vibe? Where’s that feeling coming from?
I’m not against the idea, but doesn’t it feel like something’s missing? Like, when exactly is a risk worth taking? And that word “worth,” what’s that all about? What does that even mean?
Let’s sit down and think about this for a sec.
Is it about being 100% sure it’ll work out? Or is it more like a hunch, a hopeful guess? Or is it about being ok to lose, because if it works, the reward is huge?
What’s the source?
To me, the last headline is the crucial starting point. I think, if we don’t get why we’re doing something, and learn how to reinforce this new behavior the right way, everything else is just us messing around with the surface symptoms and dancing circles around real reasons.
Let’s go beyond the Simon Sinek story.
Ever tried changing something in your life? It’s a hit or a miss, right? It’s always a risk.
Take, for example, back pain, junk food binges, or those not-so-great investment choices. We know what we ought to do, but do we do it? Often not. Or we stop doing it after we’ve tried (hard).
Why though?
Whenever I’ve nailed a goal, it’s because I had my ducks in a row. I knew what needed to be done, had a plan, and stuck to it. That plan made sense because I dug into the why - I had conviction. I chatted with folks who’ve been there, done that, read up on it. And that’s why I could kick things off - with the right mindset.
Now what does the word mindset mean?
In this context, it’s old (familiar) vs. new (risky).
We are basically talking about two feedback loops. But before I get ahead of myself, let’s build up to it step by step. By the end, it will make sense.
Enter your mind
Even the best-laid plans get tested when they meet our good old friend Reality. It’s one thing to imagine how it’ll go down, and another to be in the thick of it.
When things don’t pan out, some of us start to second-guess (feeding the old feedback loop again), while others double down (feeding the new feedback loop).
What makes the difference?
Three things.
It’s about having:
A strong enough reason - the why
Feeding the right feedback loop
Realistic expectations (this is self-explanatory)
Let’s take a closer look at 1 and 2
If your “why” is solid, you’ll keep at it because you are convinced that the alternative just sucks. And if the alternative doesn’t suck, it’s no wonder you quit at the first setback. You are feeding the old feedback loop on autopilot. If you focus on improving your reasoning instead, you won't get trapped in the same old feedback loop. But let’s finish the why first.
So, next time you’re pondering over risk and reward, or that whole “go big or go home” game, take a moment. Think about why you’re even considering it.
Here’s a little hint: your first answer to the “why” question is probably not the real deal. It’s usually hiding a couple of layers deeper.
How deep?
A good start is five layers. Try asking “why” five times and you might surprise yourself.
Let’s run through a quick example.
Why do you want to get fit?
“To look good.” Why?
“To feel better about myself.” Why?
“So I can be confident enough to ask someone out.” Why?
“Because I’m feeling lonely.” Why?
“I guess I push people away.” Why?
“Maybe because back in the days, being tough meant people left me alone. It’s been my go-to ever since.”
See what I mean?
Apply this to investing or any decision and understanding your “why” can change your perspective.
Feeding The Right Feedback Loop
Ever wondered why you stopped doing something, although you are trying so hard to achieve it? You’ve put so much work into it, and yet it doesn’t work and you don’t accomplish what you wish for.
Here is the good thing. You can work - hard. That’s a fundamental prerequisite. But how did you give yourself feedback?
In a productive, or unproductive way?
Here is what an inner conversation can look like when someone considers a new investment.
“What’s the worst that could happen? What a dumb question. I could lose all, my hard-earned money you idiot. That would suck and I would have to keep working the job I hate. So don’t mess it up, asshole. You better be right and get rich, or you suck. By the way, you already suck because your neighbor David has a Porsche and you don’t. He has a better life than you. So what should I do? I have no clue. Warren Buffet says, “Don’t lose money.” And he also says, “Be greedy when others are fearful and fearful when others are greedy”. I have no clue, so f*** it. No risk, no reward baby!”
You get my point.
Instead of worrying about what might go wrong, being afraid of the outcome, beating yourself up with negative thoughts, or making excuses for your flaws that keep you stuck in a bad pattern, stop telling yourself stories just to hide your current weaknesses to please your ego.
Instead, try this.
Feed the new feedback loop by talking differently to yourself.
Change the Game by Changing the Movie
How does this inner talk sound to you?
“What’s the worst that could happen? I could lose it all, but I don’t care, because this is about learning first and the amount I’ll invest will not ruin me. If it works, fine. If not, I’m curious why it didn’t work. And if it’s not working, where have my assumptions been unrealistic? What could I improve? Maybe finding new people to whom I can talk will help. Maybe I even find a new good friend. The world is full of great surprises. Did I miss something? Taking everything I thought of into account, is the risk still worth it? Yes, because at this stage, it’s not about the big money, it’s about learning. Oh yeah, you are right. So let’s go and have some fun while we know we will suck a little bit because this is a part of the learning process, and that’s a good thing because I will learn from it. As long as I remember to remember, I’m on the right path and I’m all set.”
See how positive that self-talk is? It’s encouraging. Constructively praise yourself, without lying to yourself. Where the first conversation was outwardly focused, the second conversation was internally focused - on things we can control.
What are the odds you stick to it even if it doesn’t work out in the first place?
I would guess, the odds are pretty high.
Chances are high, that you’ve already heard similar principals somewhere else. Yet, we are forgetters (including myself) with micro conversations that can quickly spin out of our conscious control. We need more remembering, instead of being taught more all the time. Take a look at this post, it might give you even more context.
By getting to the heart of my motives, and feeding the new feedback loop the right way I’ve started making choices that aren’t just gut reactions, but rather steps that I do on purpose supported by a positive conversation with myself.
Sure, it takes work, but believe me, getting to the real “why” behind your actions, and feeding the new feedback circle - that’s where the gold is because you become your best friend and biggest supporter.
So next time, if there's a financial instrument everyone's raving about, claiming it's a sure thing, pause for a moment.
Reflect on a few things:
Why is this even on my radar?
Do I understand how it works?
Who could offer me a well-rounded second opinion? (setting expectations)
Am I aware of the risks involved?
If its value plummets to zero, could I handle the fallout?
How will I evaluate my progress? (feeding the new feedback loop)
What is this really about? (feeding the new feedback loop)
That’s a wrap.
Progress
I’ve finished the simulator and included the S&P 500, Dow Jones, and a six percent risk-free rate for comparison. My goal is to show what you can achieve when you commit to a strategy with a long-term mindset. The risk and reward numbers are also included. Each data set can be switched off to compare it the way you want. Remember, the strategy returns you see, are still dummy data.
Take a look and tell me what you think in the comments below.
Return SimulatorThe training of my algorithm runs like a charm. I guess in two weeks it should be done.
No progress on the PayPal side, but it’s not a big deal. Sometimes we have to give time it’s time.
Plan
I’ve dug into the macro stuff and set up a new database. I’m experimenting with some metrics to see if can find some good future indicators.
What’s on my head
Nothing fancy 😊 just doing what needs to be done.
Nuggets I’ve enjoyed
Have a great day StockStar!
Hit that heart if you love your why!
Michael
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I share my stock investment story without sugarcoating – you get the good, the bad, and those tricky ego trips. I'm developing a service with a mix of smart code and proven investment strategies, making stock analysis a thing of the past if you wish. Because life offers so much more beyond the confines of stock analysis.
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
Great post, Michael. Those 'whys' help you see through emotional and impulsive decisions and direct you to rational thought.
A Great article, you wrote well about those ”five-whys”