The weather is actually a perfect metaphor. The financial markets operate with absolute autonomy. Predictions have no bearing on what will occur. It will rain when it rains, it will stop when it stops. The market is a living breathing organism.
The most educated meteorologist using the most robust technology is no match for the whims of nature. We would rather think we can control at least some elements of our potential investment return – and we can.
To influence potential returns we must regulate our vulnerability. Low vulnerability equals low risk. The lower your risk, the more tolerance you have for unexpected events. The more runway you have to recover.
The wealthy person who understands the randomness of market fluctuations is a better investor. She is better because she properly regulates her exposure. This keeps her invested, without endangering her wealth. When you’re wealthy, proportional investing is king.
In my new book, You Should Only Have to Get Rich Once, I detail an interesting betting scenario. In short, I hypothetically propose to pay $100k to an individual who is rained on while standing outside for five minutes. However, there are a few minor details.
- I pick the location
- I pick the time of year
- If it doesn’t rain the person pays me $100k
Much different bet isn’t it? Obviously, the more elements you control, the higher the likelihood of success. Likewise, when you allow someone to push you into inappropriate investments, they stand benefit. To control your risk you must control the details of the bet.