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.
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