Risk ignorance is the biggest enemy of investing

If there's one thing being a part of the market has taught over the past six years I've participated in, it would be the humility of time spent earning my knowledge base that I use extensively on a day to day basis when approaching the market, having accumulated most of it through actively taking risk which sometimes paid off handsomely while other occasions left me doubtful of my abilities.

I can honestly say that when I first dived into the world of investing I had full confidence in my aptitude having completed a tertiary level education that majored in the subjects of risk and portfolio management, diversification, quantitative analysis, methods in valuing a company and much more other things concerning the study of investment.

Yet my first interactions with financial markets led me down the pathway of error every rookie makes when attempting to speculate my wealth to greater heights and that's underestimating the importance of time and information.

My first investments were placed in a highly risky area of the stock market, namely small cap companies or as they're otherwise known as penny stocks. These stocks are characterised by the fact that the firm listing is usually a start up with a wealth of ideas looking for funding to offer its products or services as a fully fledged operating enterprise giving some seriousness to the idea.

They also contain an element of uncertainty when delving into analysis of financial steadiness exhibiting traits of little margin for error when it comes to succeeding in penetrating the market with its products and services. Management is small enough to save on cost but then so the same goes for the overbearing size of ideas that require a wider headcount of staff to launch the company's strategies into the future.

Most times management doesn't have a large enough ownership stake in the company to convince investors and analysts to buy into their outlook making them feel that the directors are happy to get a full paid salary but aren't willing to put down their own precious capital implying a lack of commitment to the idea.  

Ignorance of #risk when #investing is risky business via @TMFHousel - https://t.co/f0GlvJiMrA pic.twitter.com/69dfUM3aRn

— Andrew Stotz, CFA (@Andrew_Stotz) May 22, 2016

I say this now having learnt the hard way of going through the dreadful  experience of watching my wealth more than HALF and praying for a miracle to crop up that would see at least my entry price matched to recover some of my bruised ego. But this wasn't to be the case as the wait only served to damage my confidence more by shredding up any hope I may have had when placing my irreplaceable capital to work in stocks that kept sinking into the abyss.

The story has a happy ending, I promise, but only once I plucked up the courage to admit that I had made a huge mistake in miscalculating the risk attached to this particular financial market. It's important to be reminded that although I refer to them as one part of the financial market rather than singling them out as bad instrument there are a few amongst us with greater insight and ability to invest and successfully profit from them.

It falls parallel with the old saying that goes "A good tradesman never blames his tools"

Those few amongst us that succeed in penny stocks don't do so because they're luckier or take bigger chances but more to the fact that they understand the risk involved when dealing in these instruments and then actively find ways to mitigate them thus placing a considerable advantage as opposed to people such as my own experience basing decisions on hearsay or impulse buying.

And the same applies when dealing with any other instruments in financial markets whether it be large cap stock, bonds, commodities or even derivative type transactions.

Understanding the risk attached to the investment is the single biggest priority before committing to the transaction. If you aren't acquainted with all the risks contained in that decision then you shouldn't be proceeding with it.

You'll probably say that I could say this due to hindsight and I'd counter by saying that the risk of getting it wrong from the get go is so much greater the smaller your knowledge, stressing the need to scale down your exposure to the potential of losing it all and accepting that the process of trial and error will inevitably be the expected mode of learning to a larger degree thus motivating you to take the leap knowing you might get it wrong but not so dangerously that it costs you your entire wealth.

The belief that making easy money trading the stock market should be discarded for it only holds true for fools who have yet recognize the falsehood of these marketing campaigns aimed at making the advertiser richer yet the subscriber poorer. The realization will only set in once his wealth has dissipated and the weight of failure must be carried with burdensome financial implications.