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Chapter 15. Ten Lessons for Investors > Lesson 3: No pain, no gain

Lesson 3: No pain, no gain

It is perhaps the oldest lesson in investments that you cannot expect to earn high returns without taking risk, but it is a lesson that is often ignored. Every investment strategy exposes you to risk, and a high return strategy cannot be low risk. If you are an investor who is uncomfortable with large risk exposures, you should avoid any high-risk strategy, no matter how promising it looks on paper. Why are some investors so willing to delude themselves into thinking that they can earn high returns without taking much risk? One reason may be that the risk in some strategies is hidden and shows up sporadically. These strategies succeed most of the time and deliver solid and modest returns when they do, but create large losses when they fail.

Proposition 3: If you cannot see the risk in a high return strategy, you just have not looked hard enough.


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