In the 2018 documentary Free Solo, professional rock climber Alex Honnold does something you wouldn’t expect. He gets his brain scanned.
Neuroscientists wanted to learn why he didn’t fear his upcoming quest: an immensely dangerous, 3,000-foot free solo climb of El Capitan, Yosemite National Park’s famed granite monolith. The result? It turns out Honnold is completely immune to fear and risk.
Risk is subjective. Sixty years ago, risk avoidance in financial markets meant investing in high-grade bonds and landing a career with a large company. But notions of risk have changed. Many investors think that risk is volatility. But from my experience, it’s not. Instead, taking risk is akin to a free climb, albeit without extreme physical danger, and those who attempt it may reap incredible rewards—as long as they’re well prepared.
There are very few Alex Honnolds or J. Paul Gettys (the financial equivalent) in this world. Investors, in general, become skittish when the price of something varies a great deal. They find themselves caught between Getty’s approach and that of John Maynard Keynes. As Getty once said, “If you want to make money, really big money, do what nobody else is doing. Buy when everyone else is selling and hold until everyone else is buying.” On the other hand, according to Keynes, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
In my business of investing, not being contrarian is “risky.” In fact, rejecting popular opinion can bring tremendous rewards, as long as you’re mindful and methodical. Here are five ways to start:
Welcome volatility: Recent research has shown that higher price volatility in traded securities correlates with higher investment returns, and it creates opportunities for adept and disciplined investors. Forget the experts: volatility is usually your friend.
Change how you view illiquidity: Most investment experts equate illiquidity with risk, but they don’t quantify the degree of illiquidity. Many publicly traded securities become hard to trade in during market convulsions. This has worsened with the increase in index funds, together with open-end mutual funds. Both are equity investments with overnight funding and must buy and sell at the whim of their investors. A majority of non-publicly traded investments can be bought and sold within 30 days, though with disadvantaged pricing. Yet, private investments usually offer higher returns and more control. If you can buy larger investments, illiquidity is your friend over the long term.
Recognize operational change: Operational change is a risk. When an organization changes management, processes, or product, predicting the future requires great humility. Given the rapid pace of technology in consumer preferences and markets, every successful enterprise must plan for the unknown. As the Nobel prize-winning physicist Niels Bohr noted, “Prediction is very difficult, especially if it’s about the future.” To deal with this omnipresent risk, I select opportunities that are confronted by major change risks—such as business turnarounds—in which a positive outcome seems likely, but the price of the investment reflects the uncertainty, rather than the upside potential.
Get out of your own head: Due to how our brains are wired, we can easily become our greatest investment risk. The primal, ancient part of our brain warns us of threats daily. When investment prices surge, it warns us not to miss out. When these prices dive, it warns us to bail out. Far too many investors operate this way. While some of us are wired to remain dispassionate about risk—and I know that, as I’m one of them—the rest of us must develop the mindfulness to know when we are in over our heads. Don’t ignore when your investments are sounding alarm bells (that don’t stop going off) and take on less risk if you are unable to gain critical distance.
Keep learning: The most significant risk in my business is investment error: buying at the wrong price, selling at the wrong time, or buying the wrong thing. Everyone makes some of these mistakes, even if they’re not willing to admit it. To keep mistakes at bay, you must keep learning. You cannot acquire too much information, have too much training, build too much experience, or try too hard in this relentless business. Today, all one needs to take a shot is some cash and a computer or phone. Around the world, countless smart, experienced, and dedicated people—with an almost unlimited flow of information—are devoting themselves to selling overpriced investments to you. As the late Cy Lewis, famed trader and senior partner of Bear Stearns, once said, “An investment bought right is half sold.”
With courage, preparation, and self-awareness, you can take on more investment risks while minimizing your investment errors. Just make sure that you’re ready to do so. It’s a life that’s not for everyone.