Risk Management vs Money Management

They are not the same.

Let's use the Singapore Pools' 4D example as most Singaporeans can relate to it:


Money Management

$1 bet can win $3,000 if bet with Small option.

Maximum loss is $1

Maximum win is $3,000

Risk/reward ratio is 3,000 to 1 (Good or what? A 3,000 bagger!!! Peter Lynch who?)


Risk Management

The odds of your 4D winning the first prize is 10,000 to 1 (Source: Singapore Pools website)



Seeing the whole picture

If I'm a snake oil salesperson trying to promote an investment/trading vehicle, of course I would only stress the Money Management part, and conveniently avoid mentioning the Risk Management part.

Anyone one here were sold on the benefits of buying Options?

At most can only lose the premium right? (Same as 4D example)

But our winnings are unlimited!!! (A bit like Toto snowball upsized!) 

Isn't the risk/reward enticing?

But what if I tell you now that 75% of options expire worthless? (Source: CME reports)

Can it be the same persons encouraging you to buy options are the same ones who are taking the opposite side of the trade against you? (Tip: Alarm bells should ring if the guru "strongly recommends" a specific options broker or platform to you. Why do tour guides bring you to a specific retail store?) 


Live by the sword; die by the sword

Before you go rushing to write options, please remember that by selling options, you now have limited winnings (at most pocket the premium), but now have to bear the risk of unlimited losses.

How to visualise unlimited losses?

AIG for years were making good profits by selling Credit Default Swaps (CDS) to investors who wish to hedge against their bonds defaulting. 

All it took was one Lehman event to bring down the whole AIG down (Is AIG bigger than our local banks?). Yes, the US government did bail-out AIG, but if you are a shareholder, your holdings were so diluted that at best you can only recover 10 cents on the dollar...

Yup, if you think your Risk Management is better than AIG's, have fun writing options! And if you think selling options is "passive" income by collecting the option premiums every month, the best of luck to you! 

Will anyone bail you out if you were wrong? Hey, don't look at me.


Insurance for dummies

OK, not everyone is familiar with options. How about insurance then?

Think of travel, accident, critical illnesses, disability, term insurances and what have you. Must exclude Wholelife as we all will die one day (now you know why the premiums for Wholelife are so expensive).

Anyone have a habit of pooh pooh others who buy 4Ds, Toto, Big Sweep. Silly bunnies, don't they know gambling is flushing money down the toilet?

Ah! But you do own some of the policies above right? And?

You were probably focusing on the Money Management part (or were sold to).

Bet you didn't consider the Risk Management part.

Not feeling so smug now, are you?

Those who support Singapore Pools and those who overbought insurance products have a lot in common than you think!




P.S.  Risk Management vs Loss Management

 

Love at Changi beach

Both of them are sitting at their spot at Changi beach.

The sun is setting. 

The shimmering waves providing the backdrop to the silhouettes of people jogging, cycling, and rollerblading by. 

He turned and look at her.

Her face glowed in the amber of the evening sun.

Gently, he stroked her long tresses behind her ear.

Surprised, she whispered in a embarrassed voice as she brushes his hand off, "Stop it. People may be watching..."

"You are so beautiful," the man looked intently into her eyes.

"Stop playing around."

Bashfully, she turned her head to avoid his eyes.

But her hand reaches out to his hand.

They clasped. 

Silently, both of them just sat there enjoying the evening breeze.

"Grandpa, grandma!" a little boy of ten shouted.

"Mother says the barbecue is ready. Come back to the chalet!"

Gingerly, she helped her man rise up from the park bench. And handed him his cane.

Butterflies fly funny, don't they?

Have you seen how a butterfly flies?

Haphazard, fluttering with drunken like jerky movements, and in zigzag manner right?

Makes a mockery of aerodynamic principles no?

OK, if you are not familiar with aerodynamics, just compare the flight of a butterfly with birds and other insects like the common housefly and mosquitoes.

Why do you think the butterfly flies the way it does?

Have you ever felt like a butterfly in the company of other people?

Especially on the first day of school or work?

Others can fly higher, faster, smoother, more efficiently, or at the very least, fly in a bloody straight line! 

You can't.


Friend, have you taken a look in the mirror recently?

You are the most beautiful insect in the world, you with your mesmerising iridescent scales in full technicolour, and you are self-conscious of the way you fly???

No.

You are definitely not the condor. Nor are you a bumble bee!

Accept who you are and you shall soar higher! Without those bricks on your shoulders weighing you down, you'll feel lighter and freer!


What?

You feel down because you look ugly and hairy? You don't look anything remotely like a butterfly...

Come closer my caterpillar friend. I've something to whisper in your ears...