Good and Bad Risk Understand the Difference
Level 1 - Definitely NGMI
Welcome Avatar! Instead of doing the same old risk management post that people love to ignore, we’re going to spin it entirely. We’re going to walk through types of risk and what is “good risk” versus “bad risk”. Yes there is a difference and if you’re focused on “number go up or down” for any stock or computer coin, we’re sad to tell you that you’re definitely NGMI.
Risk is defined as: “1 : possibility of loss or injury : peril. 2 : someone or something that creates or suggests a hazard. 3a : the chance of loss or the perils to the subject matter of an insurance contract also : the degree of probability of such loss.” - Merriam-Webster
Since we’re focused on financial independence and becoming homeless (hint: no one rich wants you to know they are rich), we’ll use various *financial decisions* to explain risk. Most people think “number go up” good and “number go down” bad. Which is purely emotional thinking. So. We can jump right in.
Types of Risk
For simplicity when it comes to your money here are the types of risk you should think about: 1) asymmetric risk - high upside with risk of a zero, 2) risk of unprotected tax loss, 3) risk of temporary financial loss - this would be a *blessing* vs. structural risk and 4) risk of time loss - the biggest risk you can take.
#1 Asymmetric Risk
When you spend your time looking at options we can use a $50,000 investment example first. At this level, unless you get a 10x you’re not going to make life changing gains. Even if you double the money having $100,000 or $50,000 to your name isn’t life changing. It certainly helps. However. Anyone who can save up $50,000 quickly can do so again and again (usually means they have a high income).
Therefore if we think about your first $50,000 saved you really have three options: 1) asymmetric upside, 2) steady 7% long-term returns in something like stocks or your primary residence or 3) starting your own biz. Unless you’re already wealthy, this means you’re going to look at option 1 and option 3 - asymmetric risk.
Asymmetric risk means 1) a high risk venture investment that can go to zero or 10x+ or 2) starting your own business which can go to zero with unlimited upside 1,000x+.
Now before people say “90%” of businesses fail. You have to remember that 90% of venture investments fail as well! Therefore the question becomes… which one has the better risk-adjusted return: obvious answer is a side business.
In the second option, if you go to zero on a business, you can deduct expenses and you actually learn something. This seems to be ignored time and time again. If you buy $50,000 of anything, you don’t learn anything. All you get is a -$50,000 and a “thanks for playing” on the screen - eg. what happened with LUNA.
Autist Note: You can see that nothing was learned real time as people suffer from cognitive dissonance and argue that a 20% return stable coin was not a ponzi. Meanwhile trillions are invested every single year to try and get 5% steady returns. This fact alone should tell you anything with 20% is likely a ponzi. Shocking, but even the 8% yield on ETH staking is a high risk venture!
Conclusion on Part 1: Unless you’re already set for life (never have to work), you should continuously look at asymmetric returns in your own business/equity. If you just throw money at venture investments you learn nothing in the process. You simply watch charts and read press releases. This doesn’t create any tangible skills.
If you start something, the worst case scenario is you learn what does and doesn’t work. You didn’t lose the most valuable resource - time. It’s quite scary to think that there are many people who have absolutely no skills sitting on $1M from scam tokens. While they will be fine for now, the habits they have built will send them down the path to ruin. Expect a lot of unemployed traders in both up and down markets.
#2 Risk of Loss that Isn’t Tax Deductible
Look no further than the Otherdeed project from BAYC. In simple terms, raise millions in $APE coin at $21 and according to the law you’re forced to book that as revenue. Just to keep it simple multiply by 1M and you get $21M in “profits” (note we didn’t look up exactly what they raised we just want to make a point).
After this the price of the $APE coin falls by 2/3 (it actually falls by less but keep it simple) and you’re at $7M in tokens. Now you owe 35% tax on $21M = $7.35M which is worth more than the $7M in $APE coin you hold.
This is quite the predicament. While we’re unsure how the structure at Yuga Labs is set up you can see how a poorly structured crypto tax accounting structure can take you out *quickly*. (the 1,000,000th reason why any big individual/entity should be in a legal tax haven).
Impact to Your P&L: For those that run even a small side hustle (we don’t knock a single one as our first monthly income check was $8 - Lol doesn’t even afford Subway), you should think about the implications here.
Joe Average decides “i have some niche knowledge about small dogs” and he puts up a dog based website generating $200/month. Joe may not be incredibly skilled for now but he learned how to build a basic content and product site to sell some dog toys that are niche. In the end, he can write off another $100 a month for wifi/cellphone bills etc (100% legal) and he’s sitting on $150/month in *implied* profit (rough maths)!
Griptoe Joe decides “I’m just gonna make it by 10x returns every month and follow a bunch of memes!”. He blows up and loses $10,000 and isn’t even able to use this to offset anything (he is unemployed). Since griptoe computer coin trading isn’t a revenue stream there is nothing from uncle sam except a big sign that says “Thanks for Playing!” Also. He learned no tangible skills in the process and is developing a gambling addiction.
Conclusion: *after* you become a big fish, your risk goes up by design (thanks uncle sam!). Since your net worth it tied more to assets and decisions, you have to lower your net tax rate *legally*. Until you’re in this position, best to generate a few hundred bucks, thousand bucks online since you can use the deductions to ramp up your savings. Notice: people like BowTiedSalesGuy who is now generating a living wage online is able to deduct a ton of stuff - his internet, phone, part of rent - if smart and more.
#3 Temporary Financial Loss Risk vs. Structural Risk
This one is the bread and butter. If you read nothing in this post we suggest you read this so you become a better investor. If you’re not a good investor we would wager a TON of money that this is the reason.
Go through a 10-K filing of any company. You will find a section called “risks” and they are wide ranging. They will talk about things like earthquakes, competitive pressures, geopolitical concerns, supply chains etc. What they don’t teach you in business school is *which risk matters*
Good Risk: What? That’s right. There is such a thing as *good risk*. Good risk means that you want this event to happen so you can accumulate more. If that sentence is surprising, great! You will become a better investor after the next three paragraphs.
Good Risk: Take a major Ice Cream chain like Ben and Jerry’s. Sure some people may hate them but that’s not the point. The ice cream industry benefits from hot weather. This is simply how the industry works. It is a “impulse buy” industry so if you’re in a hot area and walk by a Ben and Jerry’s the probability of you buying goes up. If it’s freezing, the probability of you buying declines.
In a filing for a ice cream shop you would see a disclosure like this “unfavorable weather conditions that may impact results”. This means if the stores have cold weather all year, sales could be down.
Risk Event Happens! You want to buy stock in Ben and Jerry’s (yes we know it’s not a ticker just an example). You hear on the news that *all* Ben and Jerry’s locations had a *freezing* summer. Temperatures dropped dramatically and sales plummet! They are down 20%. The stock sells off.
Conclusion? You buy.
This is what a smart investor would call a “good risk event”. This is seen as a bad thing on Wall Street since numbers are down for the quarter. A business owner would take a different stance and say “time to load up”. Unless there is a reason why the weather will be bad for the next 10-20 years you should be thrilled at this opportunity to own a TON of Ben and Jerry’s stock at a steep discount.
Example of Bad Risk: Now that we understand what good risk is, we can move onto bad risk. Take a casino. Back a few years ago there was a large shooting at MGM grand (absolutely terrible). This was a one time event and naturally people didn’t go to the hotel for a while. The reality is that this was another good buying opportunity if you wanted to invest in casinos since the chances of it occurring again were next to none (Note: we realize this example is morbid however we’ll tie it together)
Compare that event to the following: the MGM grand shooting was done by a major cartel that has moved into the city.
The difference is crystal clear. In the first example, you’re seeing a lunatic in a one time instance. In the second one you have new information *structural risk*. If the occurrence is due to a change in the actual population and environment you have real issues. In the case that the MGM event was done due to a change in the city population, you should run and sell all your stock immediately.
Bring it All Together: Look at your investments and ask yourself why you own it. This only takes 5-10 minutes and will save you a lot of mental headache. If you own a beer company, write down the reasons you would *sell it* and that will help you avoid media manipulation. If beer sales are down because some major event got shut down due to a fluke event, you should probably buy it. If the stock is down because the CFO sold everything and has ties with Bernie Madoff’s wife, you should probably bolt.
Now we can use two clear examples: BTC price went down because a ponzi collapsed, is this good or bad? When Bill Hwang blew up since he was propping up prices with leverage was this good or bad for those assets?
As usual you have to make this decision yourself since each blow up and company is different. To spell out a simple example for long-term readers here, anyone reading this knows we’d blow out of 99% of Tesla shares if Elon Musk leaves.
#4 Risk of Time Loss
Now for some positivity for those worried about price volatility (hint pretty much every asset is down). Real risk is not a second mortgage to become an AirBnb price gouger. Real risk is not buying $10,000 worth of the hot Christmas product to resell for $15,000 on eBay. Real risk is what you do with your *time and connections*
Jungle Example: When we started building out this community sending traffic and continuing to give out opportunities for side hustles we stated we gave it a 10% chance of working. That now has a 30% chance of working and we estimate that about 35% of our readership on the paid stack “gets it” and will find their niche and make it to DeGen Island 2035.
The risk being taken is not our investments. That ship sailed in 2015-2016 or so when financial independence is hit (25x your annual spending is in stocks and your primary residence is included in the annual spending cost). The risk is time.
You can always do something else. The key is to decide on *something* to build and put your foot on the gas. Most people in their 20s refuse to make a decision (they can’t even decide on where to eat for a date!). Instead they juggle and juggle and juggle looking for the next shiny object. This is the worst use of time because each year you don’t make a decision… the year is lost forever. This only compounds in pain since your energy levels will decline from 20 to 30 to 40 (even with grey market stuff you won’t be finding anyone in their late 30s winning at fast twitch sports).
Pause and Think: The key here is draining the most “alpha” out of your time. If you’re in a secularly declining industry such as ECM on Wall Street, Mainstream media, etc you should pivot your time to growing industries: Virtual Reality, Crypto, Video Games, Software, Pets etc.
While it is fine that you’re involved in a secularly declining industry, you have to build knowledge surrounding a growing space so you can make a jump. If you work in a declining sector and specializing in the declining sector, your only jump will be to… more declines. Swimming uphill.
Now ask yourself, what are you spending your time on today? You should be building a business in something that is stable or growing long-term, you should be learning about industries that are growing long-term and you should use *any* involvement in secular declining industries as cash flows in a pinch. This way your knowledge is being built into the correct direction and when there is cross over with your skills… You bolt.
Final Note: For those that hate this side of the web and those that love it we can all agree that we want the same thing... to *disappear*. Therefore we’re doing a lot of voodoo to try and keep markets here for 83-84 more days (lights candles and begins voodoo process).
It’s a tough request but it’ll give the haters and the fans exactly what they want.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We may or may not be homeless and set for life. We’re an advisor for Synapse Protocol and on the JPEG team.
Going to miss you Bull
“Real risk is what you do with your *time and connections*”
This quote will be under-appreciated by most.