I was also thinking about the corruption in the existing financial system, because as you know the corruption is very much weaved into it, and the risk is now socialized, which is the worst possible thing that could have happened creating an "all or nothing" situation, basically chaining together the entire system, and if 1 element falls, all of it falls, creating the so called Too Big to Fail concepts.

Bio

Before I explain my proposal, here are a few things about me. I have a BS in Economics, I haven’t went for MS, because I couldn't care less, I actually got a good job position, directly recruited from there, and I found no reason to indoctrinate myself with more of the same economic nonsense. Economics is really the dysmal science because it's very much influenced by Marxist and Corporate propaganda at the same time, so it's not even a science based on empirical rational evidence but rather a philosophical justification for Government policy.

However I have an IQ of 150 and I have both real world experience in the markets and a pretty good knowledge about how the economic or even the social system works. I think this makes me a bigger expert on the economy than most tenured professors there who can't even make a coffee for themselves.

RISK itself

The biggest aspect of the financial system, and really the whole point of it, is to navigate through the "jungle of risk" with the goal to make money or to provide some service somewhere. I could probably write a lengthy paper on risk, but here I'll keep it short.

From my experience and my understanding of the world, it looks like RISK itself is almost like a natural phenomena, it's like a natural force just like Gravity or Electromagnetism. But risk is more subjective, and it covers the undesirable aspects for an individual or a respective unit.

It's almost like there is a 5th Natural Force, a force of "decay" , "decentralization" , "change". Maybe it's the so called Dark Energy that physicists are talking about, maybe it's how the Universe expands, it creates more entropy and the 2nd Law of Thermodynamics dictate.

Whatever it is, it is a massive force, perhaps even stronger than Gravity that shapes and erodes the world, and it's bottom-up.

It is when a particle slips a little bit in an electric circuit, creating an avalanche effect, which could overload the entire circuit. Or when you have a lightbulb and a random event happens, perhaps some particle overheated itself in the inner wires and the wire breaks and the bulb goes out. It is the random events that are happening at the Quantum level, that scale up to the physical world. But there is probably a 5th Force behind it.

Now risk is 1 side of this coin. The undesirable part. So if I had to define RISK I would do it this way:

RISK = The probabilistic negative outcomes associated with an event

And of course we are dealing with probabilities, not certainties. So mathematical statistical knowledge is needed if one wants to work in this field.

Financial Risk = The risk associated with a financial event

Characteristics of RISK

Now that we know what risk is, there are a few things and principles that has to be understood.

1) Risk is Permanent & Invulnerable

This is very important. So naturally people will want to minimize their risks, but that is just that “minimalization”. It doesn’t eliminate it. It can only be reduced as much, but it can’t be 0.

So when people are claiming that there is “0 risk in this investment”, they are either lying or are too stupid to understand this principle.

The other point is that it is invulnerable and persistent, so no matter how hard you are trying to minimalize it, there is always a slight possibility that the worst thing could happen. But the probability of that can be very low that in our lifetimes it should not happen.

There is a probability that a giant Neutron Star is coming towards Earth and will engulf it like hot butter. Will it happen? Yes if Earth will last until then. Will it happen in your lifetime? Probably not.

And there is nothing we can do about that to change it, but since it’s so rare, that is why we are still here. So we don’t have to be depressed about all of the possible doomsday scenarios that could happen to us or our money.

2) Risk is Management & Mitigation

Now since risk itself is permanent and invulnerable, the only way to mitigate it is to either extend it through time or through space.

Now this is very important to understand.

Through Space:

This is called “decentralization” or “quarantine” method. It’s when you have a human who carries a deadly disease that can wipe out humanity. He will probably die, and we might do our best to accommodate him, but we must keep him in quarantine otherwise we risk the entire species.

The risk of a deadly disease doesn’t go away by doing that. The disease might reappear somewhere else in some other form. What we did is just quarantine the sick person from the healthy to preserve the healthy.

So the risk is never eliminated, it’s only decentralized. There might still be a possibility that the disease can break quarantine, or that it reappears somewhere else, but unlikely if done properly.

Through Time:

The other approach is to “delay the inevitable” or the “extension” method. It is basically the Ponzi Scheme method.

It is when you are running out of money, and you are starting to pile up debt on debt, taking out new debts to pay off the old ones. You know full well that the inevitable bankruptcy is coming, but you are trying to extend it as long as possible.

** Now you don’t have to be a genius to realize which method of managing risk is better and more sustainable, it is the decentralization method **

So in neither scenarios the risk is actually destroyed, it is just fended off. In the Ponzi method, after the Ponzi scheme collapses, the risk will come in at full force, letting out all the pressure at once like a dam that has been broken and the water with insane pressure flooding everything. While in the quarantine method the risk is distributed so well that somebody somewhere will eventually take a hit, but it will be so rare like a lightning strike fatality.

Financial Markets and Socialism

Now that we know how risk works, we can apply this to finance. Obviously this disproves Socialism.

I mean the whole “Too Big to Fail” charade is Corporate Socialism. So what they did is just centralize risk, which is the worst possible thing you can do.

Socialism is risk centralization basically. And this is the Ponzi method what is happening in the financial sector right now. It’s a giant Ponzi Scheme.

So it will inevitably fail. If the risk is not quarantined then inevitably the resources will be allocated in an inefficient way and they will have to be bailed out at the system’s expense, eventually running out of resources, and then the system collapses.

The Soviet Union and any leftist country collapsed because it was unsustainable. Whatever needs external subsidy is not self-sustainable, which means that it is running a Ponzi-scheme economy.

Capitalism is the opposite of this. In Capitalism if you go bankrupt it’s over, nobody will bail you out, you have lost your money. You can’t bail out every single person who does something bad, it is mathematically impossible.

So people either restrict their bad habits that lead them to the negative outcome, or they face the consequences, nobody should in theory bail them out.

Now of course you could say what about disabled people or naturally unfortunate people. Well there is room for that, and there is certainly things within our control that we can do to efficiently help people.

Simple things like exercising, eating well, going to regular health checkups, can massively reduce the probability of some illness. Driving responsibly can also reduce the probability of becoming paralized from some car accident. And things like that…. Meanwhile the healthcare technology is evolving, who knows maybe soon we will have artificial bio-limbs.

But this doesn’t change the fact that bad instances have to remain quarantined. Alcohol, tobacco, drugs and things like that massively increase the risk probability. So these items should be physically separated from people as far away as possible. If the only cigar is 1 lightyear away from you, then you will probably avoid lung cancer.

Risk Management for Finance

Well the concept of a “Portfolio” was invented exactly because of this. A diversified portfolio means physical decentralization of your wealth. It is usually done by measuring the correlation between assets, and the lower the correlation between individual assets in your portfolio, the better.

The correlation effect is the result, but the cause of that is the physical entanglement of markets.

A market may be physically, geographically, financially or politically entangled with another. So even if you have a very diversified portfolio, if all your wealth is kept in 1 bank in 1 country, then if the bank goes bust, you are finished. Of course there is insurance and all that , but those are only backstops. You haven’t decentralized your risk well enough, so you are now at the mercy of the insurer whether he will pay you off entirely or partially or at all.

Now of course with finance things are more tricky, so you can be more playful, you could take for example more risk if the potential reward offsets the risk with a good probability. Of course it’s all just probabilities, you can’t have certainty.

But what you can do is with good math and investing knowledge you can setup your finances in a way to always be 1 step ahead and plan for probable bad events.

If the math checks out, it really becomes a game at that point. It’s playful to navigate the “jungle of risk” if you are well prepared and organized.

So maximum decentralization is needed, it’s not always practically possible, like if you have 2-3 cryptocurrency holdings, but it should be the goal long term.

In 2010 decentralization was not perfect but still advantageous, if you’d invested 100% of your money in Bitcoin, you’d be very rich by now, but if Bitcoin would have failed, then you’d be dirt poor. You could not say the same thing about the stock market, that is a less risk less reward system.

However if you’d only invested 2% of your portfolio in Bitcoin, and would have kept the other 98% financially and politically decentralized (offshore), you would have still made more money per the portfolio, than anywhere else. And if you had lost it, it would have still not been a bigger loss than with anything other.

• Example: SPX vs. BTC

Your total assets are worth 100,000$ in 2010. We’d invest 2% in BTC or 98% in stocks.

OUTCOME	WIN	LOSE
BTC	117,172,116.67 $	2,000 $
SPX	124,514.87 $	98,000 $

Obviously BTC both outperforms the US stock market in both risk and reward up to this day with this setup. And we had no idea whether Bitcoin would succeed so we’d only put 2000$ in it like in any other innovative but uncertain thing in this scenario, and we’d neither lose a lot, but potentially make a fortune.

While the stock market is more reasonable, more known, but a massive stock collapse is also possible perhaps even inevitable. What is more likely is that the broker or the bank goes bust, so your entire stock position can be wiped out due to counterparty risk. In Bitcoin the same situation applies if the money is held on exchanges, perhaps a greater risk, due to the shady nature of some exchanges.

There are also other minute things to consider and people who have no knowledge of this better learn it fast, but the general rule of thumb is that decentralization is both rewarding and safe in the long run.

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Sources:
https://pixabay.com

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