Risk IQ, The Safest Thing in the World Can Still Fuck You
I've always found the way people talk about risk slightly ridiculous. Apparently risk is something that can be measured to three decimal places by a bloke with a spreadsheet. Give him enough Greek letters and a calculator and he'll tell you exactly how dangerous something is. Volatility, beta, standard deviation, Sharpe ratios, all very impressive. Put enough mathematics around uncertainty and eventually it starts wearing a suit and pretending it knows what's going to happen.
I don't have a problem with the mathematics. The numbers can be useful. What I don't buy is the idea that risk exists independently of the person taking it. That's like asking whether a ladder is dangerous without mentioning whether it's lying on the floor or whether Dave is standing on the top rung in flip flops trying to clean his gutters during a thunderstorm. The ladder hasn't changed. Dave's circumstances have.
That's the part of Anton Kreil's Risk IQ principle that makes sense to me. Risk is subjective. What looks completely fucking insane to one person can be perfectly rational for somebody else, and what looks safe can be carrying more explosives than a Transit van parked outside a fireworks factory.
People love calling things safe. Property is safe. Cash is safe. A permanent job is safe. A pension is safe. Government bonds are safe. Safe is one of those comforting words we use when we'd rather stop thinking. Put the word safe on something and everybody relaxes, like somebody has stuck a childproof lid on the economy.
But safe for whom.
A secure job might be perfect for somebody with three children, a large mortgage and no financial cushion. Losing a regular salary could hit that household like a fridge falling down the stairs. For somebody with savings, investments, portable skills and few obligations, leaving exactly the same job might barely register. Same job, same salary, same decision, completely different risk.
This is where conventional thinking about risk starts wobbling like a pub table with one short leg. We love judging other people's decisions through our own circumstances. Somebody starts a business and one person says they're brave while another says they're reckless. Somebody leaves a well paid job and half the room behaves as though they've removed their trousers at a funeral. Why would you give up all that security.
Security.
There's that word again.
I've always thought depending entirely on one employer for my income sounds remarkably risky for something we're encouraged to call secure. One company controls the tap. They decide whether the water keeps coming out. They merge, restructure, relocate or discover that somebody in another country can do your job for half the money, and suddenly the safe income disappears on a Tuesday afternoon while Human Resources hands you a leaflet about resilience.
Yet starting something yourself is called risky.
Fair enough, it can be.
But let's at least inspect both boxes before deciding which one contains the crocodile.
Risk isn't only the chance of something bad happening. It's what happens to you if it does. That's a much more useful distinction. Losing ten thousand pounds means completely different things to different people. For one person it's annoying. For another it's six months of living expenses. For somebody else it's money borrowed on a credit card and the beginning of a financial house fire.
The number is identical.
The damage isn't.
It's like dropping a bowling ball. Drop it onto concrete and you've probably just annoyed the people downstairs. Drop it onto your foot and suddenly the bowling ball has become a significant event in your afternoon.
Knowledge changes risk as well. Something I understand is less dangerous to me than something I don't, even when the thing itself hasn't changed. Give an experienced electrician a box of wires and he'll get on with the job. Give me the same box and there's a reasonable chance Vietnam loses power.
This seems obvious everywhere except finance.
People put money into things they couldn't explain to a Labrador because somebody online said the returns were incredible. They don't know what they've bought, how it makes money, what could make it collapse or how they'd know when their original reasoning was wrong. But there's a graph pointing upwards and a man on YouTube has rented a Lamborghini, so apparently due diligence is complete.
Then the price drops twenty per cent.
Now we discover their real risk tolerance.
It turns out their risk tolerance was enormous while everything was going up.
Funny that.
Everybody has the stomach of a fighter pilot during a bull market. Prices rise and suddenly Derek from accounts is Warren Buffett with a vape. He talks about conviction, long term horizons and buying opportunities. Then his portfolio drops fifteen per cent and he's refreshing the price every thirty seconds while sweating through his pyjamas.
That's another part of risk that can't be squeezed neatly into a formula.
You.
Not the imaginary rational version of you who exists when nothing is happening. The actual you when money is disappearing.
Do you panic. Do you freeze. Do you sell everything at the bottom. Do you convince yourself the loss isn't real because you haven't sold. Do you throw more money at it because admitting you were wrong hurts more than losing another ten grand.
People are spectacularly talented at discovering new investment strategies once the old one starts bleeding.
Suddenly the short term trade becomes a long term investment.
Very convenient.
Risk IQ means knowing which version of yourself is likely to turn up when something goes wrong. That's uncomfortable because most of us prefer the fictional version. Fictional me is calm, rational and disciplined. Fictional me studies the evidence and executes a carefully considered decision.
Real human beings occasionally see a red number and start behaving like somebody has released a ferret inside their trousers.
There's another side to risk that gets even less attention, which is the risk of doing fuck all.
Cash feels safe because the number doesn't jump around on a screen. Ten thousand pounds remains ten thousand pounds. Lovely. Very peaceful. Meanwhile inflation is sitting underneath the table eating it with a teaspoon.
Nothing dramatic happens.
That's why people don't notice.
A market crash is frightening because it arrives through the front window wearing a balaclava. Inflation lets itself in through the back door and steals one fork every week. Five years later you open the drawer and wonder where all the cutlery went.
That's risk too.
So is spending forty years in a career you dislike because changing direction feels dangerous. So is never starting the business. Never investing. Never moving. Never taking an opportunity because the existing arrangement feels safe.
There is a price attached to roads not taken, even though nobody sends an invoice.
That's what makes risk genuinely difficult. There isn't a risk free button sitting on the table waiting to be pressed. Choosing one thing means not choosing another. Keeping money in cash avoids one set of risks and accepts another. Buying property swaps some risks for different ones. Starting a business creates risks. Remaining an employee creates risks. Moving country creates risks. Staying exactly where you are creates risks.
Life isn't a supermarket where the safe option has a green sticker on it.
It's more like buying sausages from a bloke at a car boot sale. Whatever you choose, some uncertainty remains.
The useful question isn't whether something is risky.
Everything is.
The question is whether the particular risk makes sense for the particular person taking it.
That's why blindly copying wealthy people, traders, entrepreneurs or anyone else seems so daft to me. You're copying the visible decision without copying the plumbing underneath it. You don't know their capital, income, obligations, experience, contacts, other investments or ability to recover if the whole thing explodes.
Watching somebody jump across a ditch tells you very little if you haven't checked whether you've both got the same length legs.
The internet has made this worse because we're surrounded by people displaying outcomes while hiding the machinery. Somebody makes a fortune on an investment and suddenly everybody wants the ticker symbol. Nobody asks whether that person had five million pounds elsewhere and could afford to watch the investment disappear down the toilet.
A twenty per cent loss when you've got enormous reserves is a bad quarter.
A twenty per cent loss when you've borrowed the money is a removal van.
That's why I don't think risk can be separated from freedom either. The more obligations hanging from my life, the less room I have to manoeuvre. Every large fixed payment narrows the road. Every reserve widens it. Every useful skill gives me another exit. Every source of income adds another leg to the table.
I don't want a life that only works when absolutely nothing goes wrong.
That's not security.
That's a washing machine balanced at the top of the stairs.
For me, understanding risk isn't about eliminating it. That's impossible unless I plan to spend the rest of my life wrapped in bubble wrap, and even then I'd probably suffocate.
It's about knowing what can hurt me, what I can recover from, what I understand and what I don't. It's also about recognising that refusing to move has consequences of its own.
Sometimes the apparently dangerous decision has more exits.
Sometimes the safe decision has one door and somebody else has the key.
Anyway, that's enough risk analysis for one morning. I'm off for a wander around the neighbourhood, which according to somebody somewhere probably increases my chance of something by 14.7 per cent.