Risky Business
Stock Market Survival & the Meaning of Life
There are only a handful of investing books that I would classify as great, but The Nature of Risk: Stock Market Survival & the Meaning of Life by Justin Mamis is one such book. Mamis, a legendary market technician, served as Assistant Director in the New York Stock Exchange before founding the Professional Tape Reader alongside Stan Weinstein in 1972. After selling the publication to Weinstein in 1977, he subsequently began publishing the long-running Mamis Letter for institutional clients. He sadly passed away in 2019.
Throughout The Nature of Risk, a 241-page meditation on the place of risk in the market and in our lives, Mamis seeks to answer one ostensibly simple question:
We grow up in such a pervasive atmosphere of caution that it becomes astounding when we read about, or see, someone who actually does take risks willingly, skillfully, successfully…And even more astonishing: there actually are a few people who never consider risk at all; they just do…How does one become able to venture forward without anxiety? How does one use risk positively?
Take crossing the street. Though we’ve become accustomed to it, at some level it involves a degree of absolute risk: technically, a car could careen through a red light and run you over when least expected. Nonetheless, crossing the street is dissimilar from BASE jumping because (ordinarily) there are fewer uncontrollable variables involved, and we can learn to effectively manage those that are present. Likewise, Mamis argues, with operating in the market:
Comparing crossing the street to activities that are beyond our control is an apples versus oranges kind of comparison. Although infinitely more complex, the stock market is more like crossing the street. (Those professorial types who throw up their hands and claim the market is unpredictable simply don't understand the nature of market risk.) We can learn all manner of careful things to do.
The remainder of the book explores just exactly what those careful things are, and more importantly, what those things aren’t:
Here is how a typical broker tries to reduce risk. He decides that you should own, and might be willing to buy if he talked you into it, a certain stock. But maybe it'll go down after you buy it and he'll be embarrassed. So he wants to reduce that risk as much as possible, both to his ego and to your wallet. The way he does that is by trying as best he can to be sure.
This, Mamis argues, is the great paradox of the market. The need to be sure, as a way to reduce risk, actually increases the risk involved:
When you know more, you have reduced your discomfort level - less "information" risk, but increased "price" risk, more market vulnerability. Because the market anticipates, the more you know, the later it is. The later it is, the greater the risk. There is no safety to buying on positive information (or shorting on bad news). Thus all information has a negative bias against the price trend.
The only way to square this circle is by acceptance and technique:
Experience, in the stock market, is a matter of accepting what there is to know, and not demanding what is not yet, or not ever, knowable. And that knowing breaks down into personalized subcategories of knowing what works within one's own technique. There is nothing absolutist to experience.
So there are several layers of technique to build on. The first is to develop the experience, and confidence in that experience, which eventually turns risk-taking into routine. The second is to make the "knowable" choice: how much do we know, so as to identify, in time and place as well as choice of vehicle, which risk, what risk, can be taken. (Sell? Hold? Buy more?! holy smoke, never dared think of that choice!) Third, not to flinch as one steps forward into the risk, but to let the risk-taking become freeing.
Revisiting the book for this short piece, I can see that I’ve underlined countless passages, and to reproduce them all out of context would serve little purpose. It’s a terrific book and I’d highly recommend you give it a read. I’ll end with my favorite line from Mamis, the one I inscribed at the front of the book:
The path to freedom is technique.
Housekeeping
My apologies for the dearth of recent posts. I decided fairly late on to apply to business school in the US, and the past two months have been wholly occupied with preparing for the Executive Assessment (thankfully, I did great) and shortlisting programs. Round 2 applications close in January. Thereafter, I’ll look to: a) resume the prior posting cadence, b) widen the remit of the newsletter to include significantly more tech-related themes (possibly necessitating a name change), and c) get the podcast up and running. Regardless, I’m super grateful for your support during this nascent phase of the newsletter and hope you have both an amazing end to 2024 and an incredibly fulfilling 2025.