When I read rag to riches stories, I was often inspired and awed by these people’s achievements. Like all the stories go, these wealthy people made great investments and often the investments went wildly successful. But in most of them, especially the super rich who started out with almost nothing, they took monumental risk.
That’s right, they took huge risk and it paid off.
Let’s take the recent financial crisis as an example, John Paulson short the market on the belief that house prices are going to drop. He bought a lot of options that would pay off if the housing bubble burst starting from a year or two before the crisis began to emerge. That was during the peak of the boom and everyone was thinking that they sky is the limit for the housing market. John Paulson went against the flow, to take risks and ridiculed by others on the way.
Gregory Zuckerman writes in “The Greatest Trade Ever” that Paulson’s hedge fund made 15 billion dollars in 2007, with him pocketing 4 billion dollars alone from the proceeds.
However, not all great risk should be taken. These risks, although huge should be calculated as to be in favor of the risk taker. John Paulson stood to lose a lot if the housing bubble did not collapsed and the house prices continue to increase for a longer period, but he also understand the immense gain from the alternate scenario and he knows that the odds of a falling housing price is very high in the future, the question left is when.
However, one should not blindly risk everything without a backup. When the price of house steadily increase, John Paulson’s fund was actually losing money and they repackage and sold those CDOs to obtain money while waiting for the right time to come.
Like it or not, luck actually plays great roles than many successful billionaires would like to admit. But naturally, fortune is the friendliest to those with a knack for calculating the odds. Hence, the ability to gauge risk is crucial to be rich. Do not usually go for the great risk that does not have an end in sights, where one can pile risks on risks. However, if you found that calculated monumental risk that you believe has great underlying value, then do not hesitate and go for the kill, go for the jugular and strike it where it hurts the most.