The Big Risk

James Holzhauer is rewriting the rules of the game. In just 15 shows, with $1.1 million earned, he is already the second biggest winner in the history of the Jeopardy!

Holzhauer recently spoke to The New York Times and explained how he thinks about his strategy

Would you describe the traditional way of playing “Jeopardy!” as overly risk-averse?

I would definitely say it’s too risk-averse. The funny thing is, my strategy actually minimizes the risk of me losing a game. There’s times in a football game where a team goes for a big TD pass. If you don’t take a risk like that, you’re not going to win. Really, the big risk is never trying anything that looks like a big gamble.

“The big risk is never trying anything that looks like a big gamble.” This is one of the most important concepts that investors need to learn.

Stocks, by every traditional way of thinking, are a risky proposition. The variance of returns, which is how most people think about risk, makes stocks feel like a way more risky venture than bonds. If stocks are Iron Maiden, bonds are Mozart.

The chart below is further evidence of the risk inherent in stocks that are not seen with bonds. On average, in any given month, stocks have closed 12.1% off their high-water mark. Bonds on the other hand have, on average, closed just -0.8% off their highs. Bonds (as measured by five-year U.S. treasury notes), remarkably, have never closed more than 10% off their highs on a monthly closing basis.

Stocks are more risky than bonds when looking at how much they decline. But that might not be the best way to measure true risk.

Stocks are clearly a risky endeavor in the short-term, but over longer periods of time, when you think about why you’re investing, what feels safe carries a hidden risk. Don’t worry, I’m not going to show the growth of $1 over 100 years because nobody has a 100 year time horizon. Just kidding, I’m totally going to show the growth of $1 over 100 years because I think it matters. Due to the corporate structure of debt and equity, stocks are likely to deliver higher returns over longer periods of time.

The real risk is not that you’ll see your portfolio decline, that’s a promise, the real risk is that you’ll seek too much comfort in your early years and leave yourself uncomfortable in your later years. The big risk is never trying anything that looks like a big gamble.

 

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