“Are you out of your mind? Do you think I’m insane?” Some people react like this when I suggest they invest in the stock market. “It’s so risky!” Actually, if you invest in the stock market properly – and there are multiple valid approaches – with the correct temperament, it’s not particularly risky. As a matter of fact, you can stack the probabilities of doing well tremendously in your favor.
There is one major caveat which I’ll get to in a second. First let’s decide on a simple definition of risk. Let’s say it’s the likelihood of losing something – in this case, money or asset value – over a particular time period.
My caveat is that risk in great stocks definitely exists, BUT that any given risk is mainly a short-term event. If you invest in a well- managed company that is successful and growing, but tomorrow a major investor named Pickle Ball needs to sell all her stock to raise money because her husband Base burned down their house (no one injured), the stock might drop. Or if economists and pundits become worried about a possible future recession occurring over the next few months, the price might drop. But give it time and the stock’s price eventually will rise, probably a lot, reflecting the company’s profitable expansion and good fortunes.
If you invest in the right companies, or in the stock market as a whole, risks are mainly shorter-term events, unless you screw it up with bad investment behavior (which millions do). So risk-averse people who shun stock investing are really focusing on the short term. It’s in the short-term where most risks live. But as a great investor, you need to think outside the short-term box.
My three main propositions are: (1) if you invest properly, there is a very substantial likelihood you’ll do great; (2) don’t always expect short-term success (tomorrow or a week from Wednesday) where most risks nest and sting like mosquitoes – be prepared to give it time; and (3) don’t engage in bad investment behavior, like gambling or selling out when fear rises.