R.I.S.K
The most important four letter word.
Academic Finance
What do they teach about RISK?
William Sharpe – Nobel Laureate
Risk = β
β = Relative volatility of a stock compared to other stocks (index).
More volatility meaning more risk; Less volatility meaning less risk.
Treasury Bonds
Does that mean they are risk free? Hmmm!
Shelby Cullom Davis
Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.
Martin Whitman
In the financial world it tends to be misleading to state, There is no free lunch. Rather the more meaningful comment is, Somebody has to pay for lunch.
Seth Klarman
Do not trust financial market risk models. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.
Charles Brandes
Volatility is measurable but uncertainity is not.
Warren Buffett
Employing databases and statistical skills, these academics compute with precision the beta of a stock – its relative volatility in the past and then build arcane investment and capital allocation theories around this calculation.
John Maynard Keynes
It’s better to be approximately right than to be precisely wrong.
Warren Buffett
Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach.
Then
What is Risk?
Meaning in Dictionary
The possibility of [permanent] loss [of capital] or injury.
Albert Einstein
Not everything that counts can be counted and not everything that can be counted, counts.
Risk of Losing Purchasing Power
Henry Youngman
Americans are getting stronger. Twenty years ago, it took two people to carry ten dollars worth of groceries. Today, a 5 year old can do it.
Warren Buffett
If you forego ten hamburgers to purchase an investment; receive dividends which, after tax, buy two hamburgers; and receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then you have had no real income from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won’t eat richer.
Warren Buffett
The real risk that an investor must assess is whether his aggregate after tax receipts from an investment (including those he receives on sale) will over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake.
Risk in Relation to Return
Charles D. Ellis
The average long-term experience in investing is never surprising, but the short-term experience is always surprising. We now know to focus not on rate of return, but on the informed management of risk.
Warren Buffett
If someone were to say to me, I have here a six shooter and I have slipped one cartridge into it, Why don’t you just spin it and pull it once? If you survive, I will give you $1 million. I would decline – perhaps stating that $1 million is not enough. Then he might offer me $5 million to pull the trigger twice. Now that would be a positive correlation between risk and reward!
Warren Buffett
The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it’s riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case.
Warren Buffett
I have never been able to figure out why it’s riskier to buy $400 million worth of properties for $40 million than $80 million.
Blaise Pascal
Fear of harm out to be proportional not merely to the gravity of the harm but also to the probability of the event.
Risk of Playing Outside One’s Circle of Competence
Peter Bernstein
The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between the effect and cause is hidden from us.
Risk of Earnings Loss
Benjamin Graham
Real investment risk is measured not by percent that a stock may decline in price in relation to the general market in a given period, but by the danger of the loss of quality and earnings power through economic changes or deterioration in management.
Risk of Concentration
Proverb
Don’t put all your eggs in one basket.
Risk of Overpaying
Part of the risk in investing is the risk of paying too much.
Puzzle
PE Ratio 300, Tech Boom, Year 2000, Infosys
Re-Investment Risk
The risk of re-investing the sale proceeds at a lower rate than the original yield.
Returns Per Unit of Stress (Health Risk)
J Kenfield Morley
In investing, the return you want should depend on whether you want to eat well or sleep well.
Investor(You) Risk
Warren Buffett
Risk comes from not knowing what you’re doing.
Moral of the Story
Mark Hebner
Just make sure that when you invest, your risk exposure matches your Risk Capacity.