The Nature of Risk Book Review

It's been four years since I first reviewed this book and I still consider it to be absolutely essential for anyone considering any sort of involvement in the financial markets. In fact, it's probably essential for anyone who is considering anything at all that entails more than minimum risk.

The amateurs miss the point. This is not about the best stochastic settings or how to massage the bid and the ask. This is about facing up to the very real risks inherent in the financial markets, including the very real risk of financial ruin. Amateurs don't see the risk; therefore, they don't bother to grapple with it. Instead, they would rather blow up and disappear. If one wants to last, he must come to terms with the nature of risk, his own tolerance for risk, an understanding of how to manage risk. Without that, he's doomed.

The Nature of Risk is a seminal work for anyone who understands that self-knowledge is key for success in the financial markets, particularly at market extremes. Rather than babble about risk in general, Mamis takes this engine apart and examines its parts, among which are information risk and price risk. He explains that as one's tolerance for information risk increases (the need to know why the stock is doing whatever it's doing), one's price risk diminishes (one is better able to jump in and take advantage of whatever opportunities for picking up cheaper shares present themselves). On the other hand, if one has no tolerance for information risk and must know everything about a stock's movement, his price risk will be that much greater because the price will likely, by then, have risen to an over-extended level. Therefore, having identified these components of risk (time risk is another), one must then balance them out in order to approach the markets rationally and unemotionally.

An extremely important work, particularly for the investor who is plagued by doubt, confusion, and anxiety.