How understanding of RISK can help you deal with your investments in a better way?

02 September 2018

How understanding of RISK can help you deal with your investments in a better way?

Greetings from Hitesh! After Value & Price, the most important factor is RISK in the process of investments. Investments deal with Future and it is impossible to know the future in advance, so understanding and managing the risk is the best key for successful investments.

Let us understand the kind of risk first.

There are various kinds of risk to various people. The main risk is the risk of Loss of capital. However, there are other forms of risk also. Let us list few of them.

1.  Volatility: - market price moving in two direction may affect the return in a given period of time.

2.  Falling short of Tgt: - Say some one is investing for son / daughter’s higher education or his retirement and he has set a goal. Now, not to meet the goal is a risk.

3.  Underperformance: - A fund manager has BENCHMARKED his fund to an Index. Now, not to beat that Index is an underperformance Risk.

4.  Career Risk: - Same fund manager my lose his job, if he comes out with Losses while Index is doing fine.

5.  Unconventional Ideas: - Many times one wants to follow some esoteric investment ideas. These may or may not generate returns. Those who invested in BIT COINS around USD 20000 knows what I am saying. This is also a risk.

6.  Liquidity Needs: - Those who have upcoming need of funds for Marriage, Medical treatments or any kind of pressing need for funds, can’t take investment call for long term. If they do, they carry a risk of Illiquidity when they need the fund back.

These are the kinds of Risk and one must keep in mind while investing. There can be many more kinds of risk depending on the individual.

Now, comes the next step: - MEASURING THE RISK.

Can we Measure the Risk?

Risk measuring is an opinion however educated or skilful it may be. It’s a personal estimation.  There are no standard methods available (should I say – can’t be developed without some assumptions and remember they are all ASSUMPTIONS). There are N number of methods but they all are having some or the other inbuilt Assumptions.

Graham and Dodd had said following things about RISK measurement in their book – SECUIRTY ANALYSES – “The relationship between different kinds of investments and risk of loss is entirely too indefinite, and too variable with changing conditions, to permit sound mathematical formulations”.

What’s more Risk is Deceptive. We can think of all obvious external factors at given point of time. Say we can expect what will happen if TRUMP’s impeachment happens in USA. But there are certain events – which NASSIM TALEB calls – BLACK SWAN events. They can’t be predicted, and we always carry that risk while investing. Last week RANA TALWAR of YES bank got the conditional approval to be at the top till further notice!! This was unexpected and the bank stock came down heavily.

The bottom line is that much of risk is subjective, hidden and unquantifiable.

If the risk can’t be measured, quantified or even observed – how can we deal with it. Skillful investors can get a sense of RISK present in any investment based on the stability and dependability of Value and the relationship between price and value. These two are measurable and quantifiable. So, the bottom line is to know the VALUE and its stability.

What NEXT?

Stephen Covey talked about “Frist thing first”. The First thing in the investment arena is VALUE. Once that is worked out, the game is in your hand. You must know the Value before you pay the price, or you are taking various kinds of RISK!!

I wish you a SUPER SUNDAY.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh.