So what is risk? Risk is generally, uncertainty.
In the markets, people measure risk by volatility, which is the wobble of the stock or markets against it's average price for a period of time.
You can read more about volatility here. I don't want to talk too much about it for this topic.
But I have a small brain. I don't think so much and I'm not really inclined to research on all the maths behind these mathematical formulas.
I define my own risk very simply. This may or may not be suitable for you so just take it with a pinch of salt. If you like it, fine, else just forget it.
For me, I think of risk when I invest in assets, equity or stocks.
And what is my main concern? Well... my main concern is when I buy a stock/bond/asset, I can't sell it at a higher price. That's all. I don't want to lose money.
So when I think of risk, my parameter is. This asset which I'm looking at. What is the chance of me NOT getting back my principal?
This is my main concern. Not so much how much it can make for me. I don't care if it can make me 5% or 30%.
Rather, I think, if I buy this stock, and the market crashes, what are the chances that it WILL recover and do better? That needs to be 100%.
I don't like highly leveraged companies. Cos those companies tend to have a higher chance of going belly up in bad times, cos once their cashflow can't cover the debt payments, trouble starts. I like government linked companies, cos there's a very very low chance that the government will let the company die.
So like for Singapore, I like companies like DBS, Keppel Corp, Sembcorp, CapitaLand, etc. Cos these are pretty much the foundation of what Singapore is built on. Cos these companies generally ensure a baseline of economic activity and stability in Singapore.
There are other good and stable companies as well, I'm not listing them all.
So to me, risk is very simple. I don't really mind if my assets drop 50%. Of course I would like to be buying when it drops 50% and hopefully I'm not sitting on the assets when it drops. But even if it drops, to me, that's not my main concern. To me, what's important is that my assets will recover from that fall and not turn to zero. So eventually, they recover and I don't lose any money.
The thing is, I invest for the long term. 10 years, 30 years, etc... Markets will rise and fall and I'm ok with that. As long as the company survives and is a good company 30 years later, just by pure inflation alone, that company will be worth more than what I bought it for.
Of course, this doesn't mean that the situation won't change. And I need to be able to recognize that very quickly. When I buy certain assets, at the time of purchase, I perceive to have no risk. Cos I am confident that the company will retain it's value, but I do read the financial statements and monitor the management. Cos I need to be always confident that there is no chance of the company to go bankrupt. Once I get any feeling that this criteria has been breached, I will sell the asset, even though the asset may continue to do well in the coming years.
To me, it's always been to err on the side of caution.
So there have been instances when I analyze the financial statement and I feel that the risk has increased to more than when I first bought the asset, then I sold the stock. Sometimes, I'm right and the stock falls after a few months or years. At other times, I'm wrong and the stock keeps going up. But that's all fine by me, cos that's not what I'm looking for.
Cos for me, I want to be able to sleep well at night. I want to be sure that in the long run, my investments don't turn out bad cos the whole business failed. And I don't mind jumping ship early cos I can always invest in another asset which fulfills my criteria.
I've heard of friends who invested in tech funds during the dot com days. They buy into a tech fund and the fund invests purely into tech, then after the bubble burst, tech stocks dropped by 90% and some of those stocks never recovered, so my friend was still sitting on around 90% losses the last time I checked.
I never want to have this occurrence.
Of course, I've lost money in investing. No one starts out being always right, we all learn our own patterns along the way and what works for us in terms of risk and return and what we are willing to accept. And I'm still learning even after 20 years of looking at markets. And as I grow older, my risk appetite also has changed, and I modify my investing framework.
And somewhere along my experiences in investing, I came up with my own idea of risk. Cos I thought, if I'm investing for 10 - 30 years, I'm sure I will experience large swings in the market. Am I concerned with that? My answer was "no". So if I'm not concerned with large swings, what am I concerned with? And I came up with my answer that "I am most concerned that even after the large swings, the company will go bankrupt, or it will not recover and I will have a definite loss".
That's my answer. I will invest when I think that the management is good and the business fundamentals are good. If I see that things are turning bad or that I suspect the management is not doing well, I sell it, I don't wait too long to decide to see if they can turn things around. There are other investments to make without having to go through that risk.
So as I said earlier, this is my own definition of risk. Cos it is what I'm concerned with. Other people are concerned with different things so you have to find what keeps you up at night. And then adjust your own investment strategy accordingly.
Just cos the general market says risk is volatility, doesn't mean you have to accept it. Cos everyone has their own concerns and maybe you are ok with volatility, and you can still sleep well with large swings in the market. Others may not be so comfortable with large movements in their AUM, so they lose sleep when it drops by even 10%, and 10% is considered a very slight drop for a single stock, but some people still get stressed over it, and that's also fine. Everyone is different so everyone needs to think of what works for themselves so that they can invest in a confident and comfortable manner.
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