A lower-class child knows subtraction and an ocean dive is yet left for you to know what the 4 words mean. For you to buy low and sell high the first question should be what is high and what is low? A value should be set for you to know what the tape is really worth. How can you buy a phone with no price tag? Intrinsic value is a number that tells you at what price the business is admirable.
Can a number tell you how risky a security is?
Many websites echo BETA representing the systematic risk of a particular stock relative to the index. Bluntly, it’s the volatility of the stock with respect to the market. Proofs still exist that volatility cannot be related to the amount of risk the investment holds and not all high volatile stocks deliver high returns. It is widely used only because it fills the dent of not knowing what the risk number is. Value investors refused to believe any number w.r.t the word risk. Moreover Volatility doesn’t sound like a threat, menace, peril, or any feeling related to danger, it just means “I swing a lot”.
The above image the risk vs return is sloped upwards to the right making us fall for “More risk, More return”. If the saying is evident high risk is no risk because of assured returns. Risk is failing to look at the events which happen other than or more than the observations.
In theory, practice and theory are the same. In practice, they are not.Albert Einstein
The bow like figure represents a collection of possibilities of return corresponding to the risk taken. In certain stages of risk the capital loss is controllable and you are left with crumbs of the principal. The riskiest asset will leave you with negative or zero principle stressing no assured returns.
Therefore, risk cannot be quantified. In the 2008 financial crisis, Lehman Brothers as a preparatory test, examined themselves of a 13% fall and blatantly boasts around of the resilience. The market crashed exactly by 13% and they tumbled with almost zero help.
Risk in inevitable:
Risk can simply be said as losing money. Risk cannot be avoided. You can perform two things with the moron either avoid risk or reduce risk. Risk avoidance in the first hand is return avoidance. Risk mitigation akin risk avoidance, but not return avoidance.
Risk is hidden:
The risk exists even in good times, they don’t materialize in optimistic environment. The environment in which the possibility of high performance is witnessed doesn’t mean that the environment will never induce a situation of materializing the risk. Risk is an introvert which shows face only being in the right environment. Nevertheless, you can’t tell how much risk you have undertaken, it’s too complex after you sell them. It cannot be considered lower risk if the price is appreciable. Probability plays crucial role in occurring events which target capital loss. As long as things go well losses do not transpire. It’s hard to understand risk at good times and even harder if the security is exited.
The fire accident shouldn’t need to happen for you to have an insurance against such incidents.
The events at the middle (A) occur too often that we tend to forget both the extremes. B part is increased return which might happen for a good year with cumulative efforts of all the influencing forces. C is almost same as B but the return is exactly the opposite and they both occur time to time. C, B can be expected in cyclical stocks and exit and entry of the investor. D, the right most extreme pushed with hope occurs before bubbles due to enviable exchanges. Event E is the aftermath of the prosperous exchanges. E, D occurs not too often, but the data on market crashes, corrections, booms can explicitly tell you on deteriorating assets and cheaply available securities.
Risk can be controlled:
Risk can be tamed.
Life insurers draft a plan for you to fall under which obviously to lay hands on the lent money. Let’s suppose the life expectancy is 70 and the insurers arrive at 80 on the policy. The premium is based on the policy holder’s health condition and other profitable needs. If the policy holder dies at right 70 the money is taken out, instead he lives upto 80 that’when the insurer gets profited. Here the insurer places his bet on someones life with a calculated risk where the occuring event is abruptly known. Either the business loses all or the sum is under written as profits.
Here the insurer is aware of the risk and places a safe bet to profit. Business risk is what the insurer carries which might materialize if the life expectancy decreases gradually or the group of policy holders, die because of flu, uncontrollable virus, due to natural calamities. A gradual change can be noted who is living with the business since the insurance market is (assume to be) efficient the policies will be re-written to recover the profitability of a product. The business is poised with acute risk and can be easily controlled.
Face the cycle:
The image represents the outline of 2008 financial crisis. The latter part of the cycle is where the risk takes shape thats the time the institutions take preventive steps for the economy to restart. Always risk goes in hand with return, but here when the lending rates are decreased it is assumed that the risk is falling and the volume increases. This is done to capture market share, also a kind of greed, that kick starts the risk cycle.
What to do with the expensive trade made:
Since a trade is made, you are bound to stick to the price. If the piece you own is a good business, the waiting period is a long haul, for the intrinsic value to match the traded price. If the business is an under performer no hope of waiting for appreciation than to sell it so quickly to avoid further losses. In the financial world, even a worthless security when bought cheap is a worthy investment. Like buying a smartphone at a discount price.
For a bullish phase … to hold sway, the environment has to be characterized by greed, optimism, exuberance, confidence, credulity, daring, risk tolerance and aggressiveness. But these traits will not govern a market forever. Eventually they will give way to fear, pessimism, prudence, uncertainty, skepticism, caution, risk aversion and reticence. … Busts are the product of booms, and I’m convinced it’s usually more correct to attribute a bust to the excesses of the preceding boom than to the specific event that sets off the correction.“NOW WHAT?” JANUARY 10 2008
The solution to get rid of risk is to buy low, and selling is not the part of the equation, it was just added to empathize fulfillment of the readers. In the book of Dhando investor, Pabrai mentioned that investments made by Warren Buffett were third of the business’s intrinsic value. Warren would have profited 200% when the business reaches it’s fair value and other baseless upsides can be attributed to freebies. Greed captures people to incur immense risk, Buy when others sell and the exact opposite when others buy.
What do you think of the risk? , loss of capital, loss of your job, failure of your business, Let us know by commenting.