Risk is Ever Present

As the old saying goes, it takes 2 to tango. When it comes to markets the old saying that risk cannot be destroyed only transferred. In any market transaction both the buyer and seller are taking a risk.  

It is important to remember that every share of a company is held by someone at every point in time. We often forget when we are selling a stock, there must be a buyer. We tend to only think about our own position not that of other investors. Essentially in any transaction there is a risk of reward or of loss. Importantly, any investor selling a stock believes that the future is risky and therefore they seek to reduce their losses by selling the stock. Alternatively the buyer sees a brighter future for the stock and he or she is happy to purchase it. 

Most of the time, there are buyers and sellers who roughly agree on a price to transact. But at other times, one party has the upper hand. At the market bottom or when most investors are panicked, it is buyers who can command cheaper prices thanks to the risk being perceived as high. At the top of the market when many stocks are overvalued, buyers are everywhere and sellers have the upper hand. 

At both points in the cycle, liquidity is a critical contributor to your success or failure.

That is why investing is what they call Pari-mutual system. Under these arrangements they can only be one winner and at some point the risk will show up as either a loss or a reward for all investors. So one investors loss is another’s gain.

Inexperienced investors believe risk is lowest at the market top when there is lots of liquidity and risk is highest at the market bottom. Again, it is important to understand market cycles because they can play an outsized role in determining your risk and therefore your reward.

Therefore, every time you are about to buy or sell a stock think about it in risk terms and realise the old saying - risk can only be transferred not destroyed. 

This will help you think in broader terms than just your own position when you realise that other investors will hold a different opinion about risk and reward.