The Name Of The Game Isn’t Avoiding Risk But Managing It
If you identify as a ‘conservative investor’ then perhaps it’s time to assess your level of financial intelligence.
When I was a kid, there was a popular game called RISK. The game is set in the Napoleonic era, and you control an army and a section of the board. The goal of the game is simple: world domination. It’s a game without mercy and requires high intelligence and much planning. It’s not a game for suckers.
In Conspiracy of the Rich: The 8 New Rules of Money, I wrote about how those who play by the old rules of money—go to school, get a job, buy a house, save money, and invest in a diversified portfolio of stocks, bonds, and mutual funds—are playing to lose. This is especially true when it comes to investing for retirement in the stock market and Wall Street’s financial vehicles.
Those who invest for their retirement in the stock market and financial vehicles made by Wall Street firms are betting on the market rising in value. They are investing for capital gains instead of cash flow. The problem is that the true money is made in trading—in the sell, not the hold. In fact, traders need the middle class to invest for the long term so that they can cash in on their financial ignorance through trades—often highly complex trades that take advantage of market swings and that require high financial intelligence.
According to the RISK product website, the following are some suggested strategies to be a winner at the board game of RISK. These rules are very similar to the ones for the trading game of risk played on Wall Street.
Focus On The Goal And The Objective
In the board game of RISK, the goal is total world domination, no mercy.
The goal is the same in Wall Street trading. This is not a charity game. It’s a chew ‘em up and spit ‘em out, high stakes game where the winners win big and losers are toast.
You Must Grow To Win
In the board game of RISK, you must grow a large army and accumulate large capital to conquer the world.
In the trading game of RISK, you must also grow large. By doing so, you earn friends in the government who will overlook your unfair advantage, and you gain insider access to make smart financial moves powered by knowledge while the little guys go down in flames.
Make Large Attacks
Making small attacks in the board game of RISK is worthless. You need to make big, large scale attacks to win. The risk is higher, but the payoff is worth it.
In the trading game of RISK the rule is the same. Small trades with little risk are worthless. Why? Because traders make money in the form of bonuses based on the size of the trade.
Don’t Hesitate To Eliminate A Player From The Game
When you’re playing the board game of RISK, there’s no room for mercy. Whether it’s your best friend from childhood or a random stranger, you have to treat all opponents the same—you have to take them out whenever you have the chance.
The same holds true on Wall Street. As the old adage goes, “There are no victims on Wall Street, just fools.” Traders are merciless and will sacrifice you, me, the whole economy to make a buck for themselves and for their firm. They don’t have your best interests at heart—they have theirs.
Know The Map
The game of RISK website says this about the game: “New players are fresh meat with huge egos.” I translate that as, “People who don’t know the rules of the game will be eaten alive.”
The same holds true for the trading game of RISK. Those who have low financial intelligence, who live by the old rules of money, will be eaten alive by the traders on Wall Street.
I want to see you win. In order to do so, you must understand the rules of the game. The only way to understand the rules is to increase your financial IQ. For instance, now that you know the rules of Wall Street, you can begin to learn how to play by those rules. That may mean learning how to be a trader.
What Type Of Investor Are You?
It’s a question insurance agents will ask if you are teetering on the edge of being under-insured, gamblers will ask themselves as they put a wad of cash on the blackjack table, and first-time skydivers grapple with: What level of risk are you comfortable with?
When it comes to working with financial planners or stockbrokers, they’ll always want to know if you’re conservative or aggressive when discussing your investments. Sadly, they don’t even realize that’s the wrong question to ask.
A bright businesswoman I know once told me that the reason she doesn’t invest in the same opportunities I do is because she’s conservative. In reality, I’d argue that she’s not conservative — she’s uneducated.
Which brings me to the question the financial planners should be asking: Are you educated or uneducated when it comes to your investments?
Saying you are “conservative” is just an excuse that could easily be translated to, “I’m uneducated, scared, don’t know what to do, and don’t want to take the time to learn.”
You see, the conventional wisdom of most financial planners is, “The higher the return, the higher the risk.” But that’s not really true. I’ll tell you what is true: The lower your financial intelligence, the higher your risk; and the higher your financial intelligence, the lower the risk.
The Truth About Risk
So many people mistakenly think that investing is risky when in reality it’s the investor who is risky. Think about it: An investment is just an investment, whether it’s a business, a property, a stock share, or a commodity. It’s you, the investor, who determines if a specific investment is a good or bad investment for you.
Not every investment you choose will be a good investment, as no investor has a 100% track record of picking winners. Yet, the more knowledge you have, the better the odds you have.
Here’s another way to examine this theory: Is a car going 25 miles per hour driven by an experienced driver risky? Probably not. Take the same car and the same speed driven by a drunk driver and that same car becomes a weapon. It’s not the car; it’s the driver. It’s not the investment; it’s the investor.
As you might imagine, I don’t like taking risks with my money. And neither does Robert. Nor do our close investor friends. We study, we research, we build up our experience. Have I taken risks? Yes, I’ve invested in stocks I knew virtually nothing about. I’ve stupidly turned my money over to a money manager and blindly followed his recommendations. Heck, I’ve even invested in a hedge-fund deal that I suspected was too good to be true. And guess what? It was.
Redefining What Risk Means
Warren Buffett says of risk, “Risk is not knowing what you are doing.” Again, the keyword is you, not the investment.
Over the years, I’ve come to define RISK as Reckless Investing Sans Knowledge. Now, in the world of investing, there are no investments that are 100% guaranteed to be safe (free from losses), but there are things you can do to reduce the risk and increase the safety:
- Give yourself a financial education
- Gain hands-on experience by actively investing your money
- Understand the investment and the return on the investment
- Have control over your investments
- Become your own financial adviser
I encourage you to stop playing by the old rules of money, and to instead educate yourself financially. Understand that the only person who can save you financially—is you. You can’t rely on the other players because their objective is to win—at the cost of you losing. You must rely on yourself and your mind. That’s why I preach that Knowledge is the New Money. You can only win if you understand how to play.
Editor, Rich Dad Poor Dad Daily