Investment Wisdom: Defining ‘Risk’

“Risk comes from not knowing what you’re doing”- Warren Buffet

Most of us have an intuitive understanding of risk. Risk is, simply put, the potential for a negative outcome. However, the challenge with this simplistic definition is it doesn’t do justice to the types of risks and could keep us away from ‘opportunity’.

"There is a tide in the affairs of men which, taken at the flood, leads on to fortune; omitted, all the voyage of their life is bound in shallows and in miseries."-?William Shakespeare

There are good risks and bad risks. A good risk is the potential of a small loss for a large gain. A bad risk is the potential of a large loss for a small gain.?

Risk should be defined in a way to keep us from the ‘bad risks’ and taking the ‘good risks’.

Keeping this in mind we will redefine risk as the probability of an irreversible negative outcome.