When I started my career in finance, fresh out of college, I worked for a Chicago-based proprietary trading firm in their London office. The firm specialized in trading derivatives, specifically futures and options. The vast majority of our positions at the time were closed out by the end of the trading day. In this type of scenario the popular consensus is that profit and loss (P&L) is king. When people start investing, it's easy to fall into the trap of making P&L the measure of success. When this happens you stop being an investor.

Some of the best traders I know are terrible investors and some of the best investors I know aren't great traders. Let's first examine what makes a great trader.

There are many different ways to trade, but at the end of the day, for good traders, you need to master utilizing margin, capitalizing on information asymmetry, reading price action, game theory and behavioral economics. When trading, opportunities are ephemeral. Being late by minutes can be disastrous to your returns.

There are many ways to be a great investor, but again, there are some attributes that great investors share. Understanding market cycles, specific economic sectors, company valuations and finances, etc.

The underlying component between great traders and great investors that is often overlooked, however, is a fundamental understanding of risk. This is the difference between legendary traders and investors, and a flash in the pan.

After working at a proprietary trading firm, a fund of funds, a hedge fund and a start up focused on identifying and managing portfolio risk, I have realized that most investors understand return but aren't as comfortable with quantifying risk. There are several reasons why and I will go into greater detail on them in future memos.

But here's the short list:

**Risk is not your P&L.

**Risk isn't about how much you lost, it's about how much you have the potential to lose

**Risk is less defined that returns.

**Is risk a dollar amount? Is it a percentage? Is it dimensionless?

**There are many ways to calculate risk.

**Sortino vs Sharpe? VaR vs CVaR?

**Know your own risk aversion.

**A lot of investors don't have a firm grasp on how much risk they can truly handle