kcchongnz has left a new comment on your post "Shall we avoid risks? - kcchongnz":

What is risk? 

“ I am a risk taker, no risk no gain.” This is what most people say most of the time when punting stocks. Risk taking seems to be a heroic thingy, something macho. But my question is do you understand what is risk when you punt a stock? Because if you don’t, and if all the time you are only talking about how high return you would get, you may make spectacular return once in a while, but most of the time, I am very sure, the outcome would not be favourable to you. 

Return alone-and especially return over short periods of time-says very little about the quality of investment decisions. Return has to be evaluated relative to risk taken to achieve it. 

What exactly is risk in investing? In academic, one of the measures they talk about is a Greek word called sigma, the volatility or annual standard deviation of the return of a stock. The more volatile, or more and big up and down swing of the stock prices, the higher the volatility, and the higher is the risk. As most investors are risk averse, or they shun risk, high sigma is not good, or isn’t it? 
But is sigma a good measure of risk? Datasonic share price rose from about 1.30 a year ago to above RM10.00 now. Its volatility as measured by sigma must be hell of high, more than 100%, 200%? By the way, the sigma of the broad market is around 25% a year. So is Datasonic a risky investment a year ago as sigma is so high, and hence risky? I cannot figure out that way, and so I don’t think Datasonic is risky in that sense, do you? 

Another measure of risk in academic is beta for a diversified portfolio of stock. Beta is also very interesting mathematically. It is the slope of the straight line when you regress the return of the stock against the return of the broad market. The higher the beta, the higher the risk of that stock in the portfolio, so it says. Surely when you regress the return of Datasonic against the return of the market, you would get a very steep upward line. So does this imply Datasonic is risky? To me it is not with the same logic as above. 

No, in my book, risk is none of these stuff. To me riskier investments are those for which the outcome is less certain. The probability distribution is wider. They come with: 
1. Higher expected return 
2. The possibility of lower return, and 
3. In some cases the possibility of losses 

In practice, risk is the danger of loss of capital, or an unacceptable low return 

Is Datasonic a risky stock with its present price now using the context of risk as just defined? 

Yes, it is in my opinion. Its share price has risen too high and a lot of future rosy expectations have been incorporated inside. The high growth expectation is extrapolated in a straight line into the future. To me, there is probability of lower return, or possible loss, not because of the poor quality of its business, but the high price you are paying. Yes, paying a high price for a stock is the most risky thing in investing. 

What is your context of risk in investment?

Posted by kcchongnz at Dec 28, 2013 10:50 AM