Although there are as many kinds of risk-takers as there are people, it is possible to divide risk strategies into four broad categories. It is very important in any risky activity (which means any activity) to identify the type of risk you are facing. If you want to be a professional in that area, you must master the appropriate responses to every kind of risk you might face. If you are content with being an amateur, you could instead concentrate on reacting well to one kind of risk, and avoiding the rest. But disaster results from trying to avoid all risks, or from taking on all risks without recognizing their types.

Investment books tend to concentrate on selecting securities, rather than how you must manage them after you buy them, and how you must deal with the ups and downs that come from ownership. If you want investments to contribute to your long-term peace of mind and financial security, it's not enough to pick good stocks. You must pick the right kind for you, and adjust your portfolio properly.

Poker books tend to the opposite bias. They tell you how to play each kind of hand you can get, but they often ignore how to form a larger strategic plan for a lifetime (or at least a session) of consistent winnings. It's not enough to play every hand right, you must do it in a larger context. Everyone, even a random player, wins some money in poker, good players keep it.

The following three questions are designed to make you think about what kinds of risks (if any) are natural to you, and which ones you dislike. It's not important to settle on one answer, you may feel attraction from two or more answers, or be tempted to reply "none of the above." Or, you may find three answers reasonable but be strongly repelled by the fourth. Keep that in mind as you read the interpretations given after the questions.

Question 1: Hold'em

Which type of starting hand do you feel you play best, relative to other people? I'm not asking which hand you like best, everyone would prefer a top pair. I'm asking which type of hand you make the most money on, relative to what other players you know make on the same hand.
A: Middle pairs like 7♣7♦
B: Weak hands usually played only for deception or when you can see the flop free, like 7♥2
C: Mid suited connectors like 7♥8♥
D: Top pairs like K♠K♦♠

Question 2: Place to Live

You've just moved to a new city and have to pick a place to live. Of course, which choice you would make would depend on a lot of circumstances such as how much money you had and how much you liked the individual houses. But all other things being equal, which of the following cases appeals to you the most?
A: Large, beautiful house in an established but vibrant neighborhood with great schools, transportation and natural beauty. But the down payment, monthly mortgage bill and property taxes are jaw-droppingly large.
B: Perfect house for which you can buy a quitclaim deed at a sheriff's auction for less than 10% of the market value. There are two lawsuits already filed over the ownership, and another person is currently living in the house and refusing to go. If you do get possession, some major repairs are needed, but you think they can be done for less than 5% of the market value of the house.
C: Inexpensive but solidly-built and well-designed house in an unfashionable place. In fact there is no neighborhood, the house seems shoehorned in between a warehouse district and a ravine. It's quiet and physically pleasant. The house has had three owners in the last five years.
D: Beautiful, renovated townhouse in a rundown and slightly dangerous area without many residential services or convenient transportation. But the price is surprisingly moderate even before some tax breaks the city offers you, and the neighborhood has been improving for a couple of years.

Question 3: Stocks

I'm going to describe stocks of four companies. I'm not asking which stock you would buy, for some people the answer would be "none, I don't buy stocks," while for others it would be "all of them for diversification." Other people would insist on far more information before choosing. My question is which type of stock do you feel most qualified to select and manage, relative to other people you know? You don't have to feel qualified at all, just which one would be most natural for you to hold. Or you may feel qualified to run all of them, in which case pick the one you are most inclined toward.

Company A
During the Internet boom in the late 1990's, company A went public and raised $100 million in cash from investors. Unlike many similar companies whose cash was paid to insiders, A used the money to develop and sell a solid product. It has always struggled, losing money every year and having trouble delivering consistent high-quality products. But it has persevered and has a major breakthrough project on the horizon. Industry experts think it has almost unlimited potential, and there are rumors that several major technology companies are desperate to buy A. You can read a lot about company A in technology and financial publications. The stock price is low compared to the potential of the new project, but if that project disappoints, the company has no net assets and negative earnings.

Company B
Founded before you were born, company B has been a leader in its industry for years. It has a reputation for hiring the best people, behaving honorably and returning consistent profits to investors. It has some of the most established brand names in the country, but it also puts liberal amounts of money into research and always has exciting new products in its pipeline. Everyone has heard of company B and it is popularly considered to be a great investment. The one downside is the stock is very expensive relative to the earnings and assets of the company.

Company C
Company C does only one thing, it makes a weird shaped cement fitting that every sewer system needs. There are no competitors, C has some crucial patents and also the manufacture requires specialized machines and expertise. Even if someone invented something better tomorrow, and there seems no prospect of that, C would have a solid business for decades selling replacements parts for existing systems. C spends only small amounts on research and development, almost all of its earnings are used to returnsa large dividend to shareholders every quarter, and increases it at roughly the growth rate in population. Almost no one has heard of company C and no analysts follow the stock. The price is low relative to the dividend.

Company D
Company D's stock price fell below $1 during the Korean War, and has not moved up or down more than $0.20 since. The board and management team have been the same for the last 30 years (except the CEO's son succeeded his father a decade ago, at the same time the father's long-time secretary was elected to the board of directors to join the CEO's uncle, lawyer and golf pro). The company dabbles in a variety of minor businesses, changing them frequently and never making or losing much money. The company has accumulated a lot of assets over the years, including very valuable real estate, almost none of which is used for anything, but which could be sold. The stock price is very low relative to the value of the assets, but since the company has no sustained earnings, is high relative to earnings.