Intelligent Investor's Notes

Five Habits of Highly Successful Investors - #5: Understand risk

Intelligent Investor
Publish date: Wed, 14 Jan 2015, 02:12 PM
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Habit #5: Understand risk
This is the hardest habit to form, simply because most of us investors never count risk as part of the equation. And those who do, have a fuzzy idea of what ‘risk’ really means.
 
In general terms, investing risk refers to the uncertainty of the occurrence of a certain event that can affect future returns. But ask Buffett, and he would go a step further. Buffett defines risk as ‘permanent loss of capital’.
 
As per this definition, risk is to lose whatever you’ve invested and not have any chance to get it back. Short term fluctuations in the stock prices, therefore, don’t equate with ‘risk’, as is generally considered in the investing circles. 
 
So the good idea for you to become a smart investor is to understand what risks you are taking while investing in stocks.
 
Before buying a stock, try to answer this question – “Can this stock cause a permanent loss of capital to me?”
 
If your answer is ‘yes’, or even ‘maybe’, you better stay away from that stock. Buying it despite knowing that it would involve risk-taking would be foolish.
 
Of course we can never eliminate risks from stock market investing, but we surely can minimise the chances of the same.
 
I believe the whole series of this articles (#1, #2, #3, #4, and #5) will help us to reduce the risk significantly.  
 
As per my earlier articles, there are 2 types of risk faced by stock investors - (1) Capital Risk, and (2) Timing Risk. To mitigate the risk, I will guide myself only buy a good companies (to reduce capital risk) in a huge margin of safety (to reduce timing risk).
 
"Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety."  - Benjamin Graham

"A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes. It is adherence to the concept of a margin of safety that best distinguishes value investors from all others, who are not as concerned about loss." - Seth Klarman
 
 
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Discussions
3 people like this. Showing 7 of 7 comments

stockoperator

Managing Risks???? Well...Margin of safety is not Only price...

1. Managing own funds like managing other people money; That is MOS.
2. Monitor the turnover of portfolio. Don't be a trader; This is MOS as well.
3. Make use of Dollar Cost averaging, you can only invest once in a year.
4. Make use of Piotroski score, ensure the reasonable price we pay is not due to fundamental changes; MOS also.
5. Will Only consider Buy if price consolidates at least few years while earning expands; That is Margin of Safety;
6. Easy to understand Business; A very common Business is alright; A more familiar Name is much Better; Good Business itself is a margin of safety;
7. Profit has never drop 3 years in a row; recession proof; Margin of safety right?
8. Dollar cost Averaging itself is a Margin of Safety;
9. Mentality of investment of at least 10 years as risks will be smoothed out and good business prevails. That is Margin of Safety.
10. Keep some cash. Keeping cash itself is investment. You may park in low risk mutual funds. That is margin of safety.
11. Dividend yields 3-5% will lower your cost of Holding each year; Make sure you receive dividend for 10 years; MOS also right?
12. Don't fancy High growth spectacular company; Surely this is MOS right?
13. Leader in the Sector Not by revenue or profit size But by profit margin or ROE, that is economy moat. Very lean and focused operation.
14. Mentally prepared for the worse and ALWAYS KNOW WHAT TO DO. CONSCIOUS.
15. If you are Not at peace and Happy at investing, there is something Wrong. Find out!
16. Healthy check on debt level, cash flow, receivables that is all working capital requirements;
17. Good Business Practice and Honest management;
18. Holding on with capital gains as your margin of safety;
19. Understanding your Business with confidence is MAKE OR BREAK. The most risky investment is Not knowing your Business;
20. Even though the list above is Long, well actually it is doing NOTHING as Margin of Safety will Only getting stronger as time pass....

2014-06-07 01:12

waiming

Good one, TQ

2014-06-07 09:43

stockraider

My comment...on stockoperator article....although I think is good.
But I ponder....what stock will fulfill & satisfy items 1 to 20 as listed ?

Raider think....almost none practically based on current environment loh.....!!

2014-06-07 13:35

stockoperator

Dear Raider, it is Not a criteria or qualification. IT IS mentality.

2014-06-07 14:16

tbm65

http://www.safalniveshak.com/smart-people-investing-five-habits-of-highly-successful-investors/

dont steal this author hard work.

2015-01-14 18:02

Intelligent Investor

Hi tbm65,

I never steal.

Please take note on the reference sections.

2015-01-14 19:16

NoPainNoGain

Good reading.Thanks a lot.

2015-01-15 12:13

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