Chapter 01 · Risk and the decision to stay
Risk is the loss you can survive
Risk, for a person with a finite surplus, is the loss that changes what you do next. A percentage on a chart is not that loss until you multiply it by the money you put in the path. This chapter turns a familiar market drop into a household number.
Name the damage, not the volatility
A stock that moves 2% a day is called volatile. The word does not tell you whether you should own it. The useful sentence is: ‘If this holding falls by half and stays there for three years, which bill breaks?’ If the answer is none, because the holding is a small part of money you will not need, the volatility is an experience, not a threat. If the answer is the school fee, the holding is too large, however convincing the annual report was.
A surplus, a fall, and the bill that does not care
Assume a household can save ₹30,000 a month after rent, food, and an emergency fund that already covers six months of spending. They put ₹4 lakh into one share. A 40% fall, which is ordinary for a single share and has happened to whole markets, takes ₹1.6 lakh off the screen. Replacing ₹1.6 lakh at ₹30,000 a month takes a little over five months of the entire surplus, and during those five months nothing else gets funded. If the ₹4 lakh was instead 15% of a ₹26 lakh portfolio of many holdings, the same 40% on that slice is still ₹1.6 lakh, but a fall concentrated in one name is less likely to describe the whole portfolio. The point is not that diversification is a charm. The point is that the rupee loss, divided by the monthly surplus, is the unit in which risk should be discussed at the dinner table.
Time is part of the definition
Money needed in eight months cannot be risked on an asset that has, many times, been down over eight months. This is not a statement about expected return. It is a statement about the order of operations. First, set aside the money with a date on it, in something whose price does not swing more than you can tolerate on that date. Then, and only then, the money with no date can go into businesses, where a bad year is survivable because no one has to sell. People invert this and then describe the forced sale as bad luck.
Three different risks that get one word
| Risk | What fails | The usual disguise |
|---|---|---|
| Business | The company earns less than you paid for | ‘It is a good company’, said after the price already assumed that. |
| Price | You need to sell during a fall that later recovered | Calling a temporary mark-to-market a permanent loss, or the reverse: calling a permanent loss temporary. |
| Funding | You used borrowed money or a future, and the lender’s timetable is shorter than yours | A margin call closing the position before your reason was tested. |
What to remember
- Convert the fall into rupees and the rupees into months of surplus.
- A loss you can replace without touching the emergency fund is an affordable loss. The other kind is a change of plan.
- Date the money first. Undated money is the only money that belongs in a large price swing.
- Business risk, price risk, and funding risk need different defences. One stop-loss does not cover all three.