“What is Risk?”

I did my MBA from a B’School that is routinely featured in the top 20 Business Schools in the world. One of the best things I liked about my MBA is how sound they made our foundations on the subjects.

We were then in second half of my MBA program and the class was ‘Risk Management’. My professor’s first question to the class was:

“What is Risk?”

Various answers turned up:

“Higher the Risk, Higher the reward”
“Variability”
“Variance.”
“Standard Deviation”
“Beta”

We came up with numerous answers but it was obvious even to ourselves that we were lost in jargon and never had given this simple question deep thought. Our professor also indulged us, until we had exhausted all possible answers and fell silent.

Finally my professor answered,

“It is the chance of losing your capital”

Suddenly, all the superfluousness of ‘high risk high reward’ / ‘risk hai to ishq hai’ all struck us really hard. And I realised,

The biggest risk is not knowing what one is doing.

Do you really understand the instruments that you have invested in?
What are the worst case scenarios?
How realistic are they?
Does your asset allocation permit the rare yet plausible worst case scenario?
What is guaranteed ? Guaranteed by whom?
What is secured? Secured by What?

Don’t get lost in jargons. Its ok to refuse to invest in an instrument you don’t understand. In fact it’s lot better to do nothing with your money than something you don’t understand at all. It’s ok to ask a stupid question. You don’t need to trust anyone with your money.