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Risk

The world of investing rarely rewards you for taking great risks. This is surprising. We are taught that to make a lot, you need a risk a lot. Not true.

Instead, you should maximize the reward and minimize the risk. The only way to do this is to know what you are doing.

One man's risk is another man's certainty. If you know enough about the situation, it is a certainty and not a risk.

Here are some steps you can take to minimize risk:

1. Invest only in things that are well known to you. If you are not sure, stay on the sidelines until you are absolutely sure.

2. Only invest what you can afford to lose.

   Even if you are absolutely sure, you must be willing to hold back some of your money in case you are wrong.

3. Cut the risk by diversifying across industries. Never place more than 1/12th of your net worth in any one industry.

4. Invest a little in order to gain a lot rather than investing a lot in order to gain a little.

   You can really hurt yourself by assuming a lot of risk for very little gain. Do just the opposite. Risk little for much gain.

5. Never invest in something unless you are absolutely sure that it is going to work out. If you are not sure, wait it out on the sidelines until something better and more sure comes along. Wait as long as it takes no matter how long it takes.

6. Remember! With advanced understanding, what appears to be a risky situation to most people can be known to you to be a very secure situation. Don't follow the crowd. But do wait until you are absolutely sure.

It sounds impossible but the more sure-fire an investment is, the more likely it is that you will make lots of money.

On the other hand, risk by itself is a strong leading indicator that an investment vehicle you are interested in will never work out no matter what the circumstances.

It is a mistake to view successful investors as risk-takers. It's an easy mistake to make because it is an outsider's point of view. Inside the successful investor's own head, he sees himself as taking no risk at all.

It takes special knowledge to know that you are not taking a risk when other people think you in fact are. To gain this special knowledge, wait until you are sure--absolutely sure--before making your next investment move.

Only invest in things you are sure can depend on.

©Edward Abbott 2003