2. Foreword
I assume no one wants to take on risk and the
word is so often used to describe the stock
market that even a kid (when I was 15)
believed that the market was “risky”.
But what is risk and how do we reduce it?
3. What You Will Learn
● The very definition of risk
● The 5 types of risk
● How to manage risk
4. Dictionary Says..
By definition, risk is officially
“The hazard or chance of loss” –
Dictionary
No arguing about that definition because you
could easily lose your pants in the market.
5. However, the above definition
doesn’t provide anything in
perspective. It is just a generic
meaning that people spurt out in
any situation, and especially in
regards to stocks.
6. Risk in Context
If we go with the above definition, driving,
cycling, walking or basically breathing the smog
outside our homes is risky.
Yet not many people overly worry about being
in a car accident, tripping and breaking their leg
or getting lung cancer from smoking. Why?
7. Because we understand that if we do
things a certain way, we can be close to
risk free.
8. Being an alert, defensive
driver will help you avoid
many accidents.
Looking in the direction you are walking
will prevent you from hitting the pole in
front of you (I learnt this the hard way..),
and smokers understand what they are
doing from the very beginning.
9. Let me go through some different types of
investment risk and the order in which I would
rank them.
10. 1. Financial Risk
The basic rule of thumb is that you
● should not consider the market like a
savings account
● should not invest money which you will need
to use in less than one year
Markets go up and down.
11. There is no guaranteed return for just
depositing your money into a fund or stock and
since we can’t predict the markets, if you have
something urgent coming up, like a wedding,
keep it in something liquid and stable.
12. I also find it surprising that many investors,
usually single young males, do not have their
finances in order before investing.
13. There are people who have fairly high
mortgages or rent, car, utility payments etc yet
use up a big chunk of their paychecks for the
market and then claim they are living
paycheck to paycheck and finding it hard to
make ends meet.
15. 2. Over-Confidence Risk
One of the major killers to any investor or
person in general. I also call this “I know what
I’m doing” risk.
When times are good and the market is rising
anyone can make money.
16. We may take this as a sign that our investing
strategy and acumen has greatly improved and
signs of what is to come.
17. When good things happen, our heads usually
get bigger, and it’s when our heads get to
heavy for our necks to support, something
goes wrong.
18. Think of 3 people that you
know personally that invest. I
am going to ask you a simple
question.
20. Most people would have answered yes but
maybe our better halves are actually better..?
21. 3. Asset Management Risk
So you already have your financials in order
and know yourself pretty well but without
proper asset management, you could be
exposing yourself to additional risk.
22. A good poker player
always makes bets or
calls a bluff in
conjunction to the pot
size.
They strictly
maintain their
money management
and bet accordingly
depending on the
odds.
24. Do you track your portfolio in detail other than
the stock price and how much gain you have?
25. 4. Business Risk
This risk is familiar and easy to reduce. First of
all, this has everything to do with whether you
understand or not.
A business is considered risky due to many
factors.
26. ● Erratic cash flows
● Majority of revenues
coming from one
product – refer to
AeroGrow, GeoEye
● Lack of management
experience
● Financial insolvency
● and so on
If you understand the
company and how it all
stacks up, your perception
of the risk will obviously
differ to someone who
doesn’t understand it as
well.
27. Like I mentioned before, a smoker perfectly
understands the risk involved with smoking and
has a different view than the non smoker who
sees far greater risk.
28. 5. Valuation Risk
Another obvious risk. Don’t overpay, or if
you decide to, don’t
overpay by a
ridiculous amount.
29. When I go through companies and I don’t know
what it’s worth, it ends up in the pass pile.
30. The Moral
As Buffett has said regularly, risk comes from
not knowing or understanding.
31. “With All Thy Getting Get
Understanding”
– Proverbs 4:7