Some risk axioms
I keep wondering whether I should write a book just describing risks. Then I keep telling myself if I cannot write half as well as Taleb, I should not.
However here are a few axioms on risk – gathered from here, there and through experience.
Like Beheram Contractor, a.k.a Busybee would have said – all my own work!
So here are some:
If we want to be successful as investors, we have to understand what motivates us as well as how the emotions of others move investment markets
Remember what others think determines the PE of a company. I may thing Shanti Gears is a good share and a great buy at 50. For me to make some money, the company has to do well – increase its earnings and pay decent dividends. For me to make serious money more and more people HAVE to think like me, the company has to do some financial PR. If this changes and motivates the emotions of many others, I make serious money.
Hope and regret drive markets – not fear and greed
I am so tired of hearing that it is fear and greed. It is hope – when you buy a share you are hopeful. However if it does not do well, it is NOT GREED that makes you hold on…IT IS REGRET. Admitting your own mistakes to YOURSELF is not easy. This is also a very important reason why many fund managers cannot communicate well with their clients. Very tough when the client says ‘I told you Mahindra Infotech will out perform Infosys’ – the FM would be seething in rage, but cannot do anything. Grrr……regret, not greed.
As we lack the clearness of mind (and therefore purpose), the opportunity or the capability to make timely decisions, we opt for simple, low-volatility investments
We do not want to think of negative returns, volatility (head spins, right?) and the feeling that to have a lot of money, we have to EARN a lot of money, we ignore learning about investing. We also ridicule people who manage their money well….
rajivahuja
Nice article. All the right reasons one should consider while investing.
Pandu - NPR
Risk is not something that is easily understood. I have found that through hard ways, when talking to common man.
Just put forth ways one can easily mitigate Risks. For a common man, who does not understand OR loses money in direct investing, these may stand good.
1) Asset allocation. 40-50% Real estate, 40-50% Equity through Mutual funds. 10-15% Gold. 5-10% in Cash equivalent(s). Depending on one’s total wealth (1 crore or 10 crores), cash equivalent %-ge may vary.
2) Advocate SIP through selected Mutual Funds. Importantly, tell people to invest through ALL times (both down markets & up markets).
3) Periodic review of one’s investments – best done once a year.
4) Maximize Tax savings through 80c, 80d. This is more wealth maximization than Risk management, but goes well with next point.
5) Take appropriate insurance(s). Term Insurance, Health Insurance, Rental/Home Insurance.
6) This is also important. Write wills & trusts, to ensure your wealth passes hands seamlessly to your intended recipients. Isn’t it Risk management as well?