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The Myth of the Risk Taker: How to Actually Make it Big

On a Monday in 1987, the world ended.

The contagion hit Hong Kong first. From there, it spread west to Europe. London fell. Soon after, it was in the United States.

Billions of dollars vanished. The big shots on Wall Street were caught pants down. Stocks crashed. Everyone was shouting and selling and nobody knew why…

That day would become legend.

In the world of finance, they call it Black Monday — the largest one-day market crash history.

Millionaire traders lost their entire fortunes overnight. Shocked turned to depression. Some of them started shooting. Brokers were killed.

This wasn’t supposed to happen. Wall Street was armed with the best and the brightest — Ivy League superstars, mathematical geniuses and fearless hot shot traders. Nobody saw the crash coming.

Almost nobody.


On that same day — October 20, 1987 — Paul Tudor Jones walked home with an extra $100 million in his pocket.

Moments before the crash, Paul blinked. The little blips on his trading screen, representing stock prices, were acting strangely.

Instinct took hold. Something big is going to happen. I can feel it. There’s gonna be a crash. Trusting his senses, Paul made a bet. If he was right about the crash, he would be a rich man.

The rest is history.

Hollywood Risk

If you’re like me when I heard this story, your brain probably went: Oh my god $100 million. Just give me 1% of that. What a ballsy dude. But I’ve got kids. I’ve got a mortgage. I can’t risk th-

Wait, wait, wait.

Who said Paul Tudor Jones was ballsy? Who said he risked it all? Where did these assumptions come from?

Let’s think about this.

When you hear the word “entrepreneur” or “trader”, what comes to mind? Here some things I think of: Risk. Danger. Adrenaline. Gambling. Aggression.

But is this really how risk takers operate?

Let’s look at advice from some of the top traders in the world:

  • “Don’t focus on making money; focus on protecting what you have.” -Paul Tudor Jones
  • “The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.” -Ed Seykota
  • “My money management techniques are extremely conservative. I never risk anything approaching the total amount of money in my account, let alone my total funds.” -Randy Mckay

Hmmm, that’s strange. Protect what you have? Cut losses? Extremely conservative? If James Bond said these things, everybody would walk out of the movie theater.

Humans love rags-to-riches stories. We worship college dropouts like Bill Gates, Steve Jobs and Oprah Winfrey. We love how they risked it all and made it big. But is that really how things happened?

The truth is, successful risk takers are often very, very risk averse.


They Call Me Brave

I have a reputation for taking risks.

Two years ago, I promised I would never wear a necktie again. I was never going to do something I didn’t want for a cause I didn’t believe in.

I quit my job. I sold 90% of my stuff and traveled to a bunch of countries. I freelanced for money. I started a bunch of businesses that failed. This year, I quit freelancing to write full-time.

Friends see what I do and say, “Wow, that’s really brave. I can’t do that.”

The thing is, that’s just not true.

I’m terribly afraid and terribly risk averse. I’m afraid I’ll be stuck at a job I hate. I afraid I’ll be fired one day for no real reason. I’m afraid I’ll wake up in a hospital bed one day at eighty years old, wondering what I’ve done with my life…

I’m no testosterone-crazed daredevil. Real risk-taking is cold, calculated and completely learnable.


The Art of Risk-Taking

First things first. Everything in life is risky. People get fired from “stable” jobs. Doctors get sued. Innocent people get convicted. Nothing in the world is 100% safe.

Every choice involves sacrifice. Risk-taking isn’t about doing dangerous, scary stuff. It’s about managing choices to get the best possible outcome.

Good risk-taking comes down to two main principles: (a) do not die and (b) win more than you lose.

I. Do Not Die (Eliminate Risk of Ruin)

In order to succeed, you must first survive. -Warren Buffett

In real life, game over is game over. There are no second chances. Your first priority should be to make sure you don’t die.

  • Never risk more than you can afford to lose. Skilled traders risk less than 1% on a single trade. That makes it almost impossible to go broke. Same thing with entrepreneurs — many startups started as night or weekend projects. When Bill Gates dropped out of Harvard, he made sure he could get back in if things didn’t work out.
  • Have an “uncle point”. When I quit my job, I made a rule. If I ever dropped below three months of savings, I would go home and cut my losses. That was my uncle point. Always live to fight another day.
  • Build a safety net. Then build another one. I keep three months of savings in my bank. That’s my first safety net. I never, ever touch it. Next net: I only own 30 things. If somebody robs me naked when I travel, I can be operational for less than $500. Net number three: if all else fails, I have friends and family. Always have insurance.
  • Have a lot of lungs (diversify). You know how humans have two lungs? If one lung fails, you can still survive. I try to have multiple streams of income. If a client fires me, I have other clients. I can make money from translating, from programming, from writing, from marketing… If someone invents a robot to replace me, I am hurt but not killed.
  • Test-retest. I always want proof that something will work before I take a big risk. Before I quit my job, I spent a year of nights and weekends learning to program. I started doing paid freelancing gigs. By the time I quit, I was already earning money.

II. Win More Than You Lose (Find Asymmetric Risk Reward)

“Wealth is not a number of dollars. It is not a number of material possessions. It’s having options and the ability to take on risk.” -Charlie Loyd

Here’s a common belief: Go big or go home. To make $1000, you have to risk $1000, right?

Not so.

Instead, go small to go big. Real risk takers are looking for asymmetric payoffs. They want to risk $0.10 to make $1000.

This is what Paul Tudor Jones to make $100 million in 1987 — he saw an opportunity to make many, many times his bet. If he was wrong, he would be hurt but not killed.

Some ways to add asymmetric thinking to your life:

  • Craft win-win scenarios. Last year, I spent a few months learning to play poker. I didn’t make much money, but that was fine. Why? In those few months, I learned all these concepts that they don’t teach in school — probabilistic thinking, emotional control, money management, etc. I didn’t make money, but I learned something. There was no way to lose.
  • Keep your upside open. When I write an article, the minimum number of people it can reach is zero. But what is the maximum? A million? Ten million? It’s almost infinite. If your startup fails, you lose only what time and money you invested. But what’s your upside? You could be the next Facebook.
  • Do a lot of experiments. I didn’t know I would like writing. It started last year as a small blogging experiment. Before that, I tried many things that I didn’t like. It’s hard to know what will work in the long run. So try lots of things. Your first business idea probably won’t work. It takes a lot of failures to make an “overnight success”. Learn from your failures and keep going.

That’s it. No madness, no adrenaline and no insanity. Just make sure you don’t die and make sure you win more than you lose.

So here’s my point. Don’t listen to the stories. Don’t let “I’m risk averse” be the excuse that keeps you from doing what you really want to do.

Two great resources to retrain your thinking of risk are Nassim Taleb’s Antifragile (this book made me decide to quit my job) and Jack Schwager’s Market Wizards a collection of interviews with successful traders.

Cheers.

The Polymath Project

Figuring out how to live in a world we don't understand

Charles Chu

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Rethinking the obvious @ http://thepolymathproject.com

The Polymath Project

Figuring out how to live in a world we don't understand