Book Club: "The Nature of Risk" by Justin Mamis

This is a fantastically written book about how we perceive risk.  Mamis has written several more famous books in his day (80s and 90s) about stock selection and a great book about when to sell.  I’m glad I found this one after the first two, because discussions of risk certainly resonate me more now that I’ve been trading bigger dollar amounts actively.

Chapters are filled with anecdotes relating fear and human sense of risk to everyday situations.  Once Mamis establishes a foundation of how to view risk he then starts applying it to a multitude of market situations.  If you’ve ever bought at the top or sold at the bottom (all of us) this is usually due to being on the wrong part of the risk/fear curve that Mamis has so simply illustrated.

Another favorite section was about what Mamis calls ‘Market Language’.  He reasons that most people give up on the stock market because they claim it’s ‘irrational’.  This is because we try to describe the manorket in our narrow sense of logic and rationality, instead of considering that maybe the market just communicates with us in a different language.  Without this realization, we are perpetually trying to force the market to act “logically” in our paradigm of common sense when what we should be doing is simply observing how the market is ACTUALLY communicating.

He steers the reader from understanding risk, to accepting it, to actually cherishing it in a way.  Risk is not something to be avoided he says, for if there is no risk in a trade then there is no potential for profit.  You only can initiate trades when there is information that is unknown, if you wait for more information you lose the possibility of making money.  This is a gross simplification but that’s a taste of his ideas.  I’ll definitely be re-reading this one and encourage anybody that wants to buy and sell stocks to do the same.  If you are someone that doesn’t for fear of not being able to win, Mamis just might convince to you get out there and take some risk (in the markets or in life).

This is most definitely worth a read, and one of my favorite classics on risk. You can grab it here.