Investing Risks – What is Risk?
Posted on | January 28, 2010 | No Comments
Looking at the risks of an investment is vital to understanding whether or not it is a sound investment. In a speech Alice Schroeder, author of Snowball, said that Warren Buffett starts his examination of a potential company by looking at the risks involved. If the risk is too high, he won’t go any further. He literally stops looking at the investment. Examine the risk first then proceed. It is the opposite of what most of us do. We would be wise to follow this example.
But what is risk? Risk is not the same thing as volatility, although volatility is often used synonymously with risk. I like Ben Graham’s idea of risk which is, “Real investment risk is measured not by the percent that a stock may decline in price in relation to the general market in a given period, but by the danger of a loss of quality and earnings power through economic changes or deterioration in management.” The thing to be concerned about is any permanent loss of capital.
The focus of this blog has been on value investing strategies and to help people find a manner of investing that works for them, that will, hopefully, also minimize risk. Because it is such an important topic I will return to this theme off an on. I think to many people ignore the risks when investing. This is a reminder to never forget that their always risks, some of which are unaware. Although he was mocked for it at the time, the following statment by Donald Rumsfeld is worth pondering, “As we know, there are known knowns. There are things we know we know. We also know There are known unknowns. That is to say We know there are some things We do not know. But there are also unknown unknowns, The ones we don’t know We don’t know.” Beware of the unkown, unknowns.
Tags: Beginning Investor
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