RISK

[tech/a]

When you mention Risk most peoples eyes glaze over. I know mine did.

But whether youre in Business,Property,Just going about daily life or trading---RISK is constantly there.

For me its a pet topic,some years ago I learnt the risk of not understanding RISK.

The biggest Risk of all is not taking any

Find Risk and you'll find opportunity

Recognising,understanding,quantifying and making Risk work for rather than against you will be the single most positive thing you can do for your endeavours in creating financial security.

I wont have the time nessesary to devote to the topic this weekend but will return to discuss when I can. In the meantime I'm hopefull that this may generate some constructive discussion.

The greater the risk the greater the reward

One well heeled quote I dont agree with!!

 

[Milk Man]

Definitely interested in what some of you more experienced guys have to say about risk, particularly in business and/or investing in general.

Whenever I get into a discussion about trading with someone I always say that risk/money management is the most important part. This is something that confuses most of them as they generally think 'winning' would be the most important part. Thats probably why when the ripped skin report says it gets 70% winners or whatever, they get subscribers.
For me its about quantifying, managing and minimising risk while maximising reward. Nicks low risk position sizing system has been a godsend to that end; what else can we use?

 

[bullmarket]

I mitigate investment risk through diversification and fundamental analysis (as I described in other threads).

Nowadays I invest with income as my number 1 priority and with my current risk profile I am invested only in LPT's and energy/infrastructure trusts for their high yields.

I mitigate my risk to LPT's by restricting myself to those that meet my criteria which include having no or very little exposure to property development, good quality tennants with long average lease expiry times and price/NTA in the 1.0-1.10 range.

I'm now starting to also look at trusts that invest in the European property market for extra diversification and spread of risk.

cheers

bullmarket

 

[nizar]

Interesting thread

I remember reading an article about Warren Buffet and George Soros where risk was discussed.

The author was saying that while one thing to amateurs may be risk, to the experts there are no risks eg. a painter walking across a thin plank of wood from building to building - risky? but not so to him... eg. a stunt-master performing crazy moves on a motorbike - risky? not so to him, filled with experience...

Apparently it takes Warren Buffet 10minutes to analyse a company to see whether its undervalued or not. He bought some newspaper company for $80million, which was what the market valued it as. According to his calculation, it was worth $400million ie. if the company liquidated all its assets + intangibles + cash, etc, this was the value. If you ask him if it was risky, he'll say no... EVEN though he made a loss because the market did not realise this value until 2 years later....

George Soros made large bets against the UK pound, he didn't see it as risky, because according to him, the most he could lose was 4%..

So risk is definately different for everybody, but managing/minimising that risk is the key, especially for us mere mortals!!

 

[tech/a]

RISK is RISK.

Perception will always differ.
Tolerance will always differ.
As will methods of Mitigation.

As can be seen from the responses so far.

 

[Knobby22]

RISK is RISK.

Perception will always differ.
Tolerance will always differ.
As will methods of Mitigation.

As can be seen from the responses so far.

Very True. Well said.

Risk is not very quantifiable.
It takes experience and knowledge to be able to judge risk.
As you say, perception varies. You often see people in life taking huge risks for medium gains and ignoring almost risk free smaller gains. Soros took on the English pound, it appeared as a huge risk but he knew exactly what he was doing so the risk was actually small, it was merely an opportunity.

I have what I consider a medium tolerance for risk.
It is risk based on my perception as to the possible upside, possible downside and the odds of each. And I do lose, Over time I have lost less often but I still make bad decisions... but that is what risk is all about.

My mitigation technique is to take these risks over a number of companies.
I do not invest in foreign markets or use derivative products to obviate risk.
Some would say this is risky behaviour but I prefer to trust my judgement than spread it all around and get safe ordinary returns.

 

[bullmarket]

Hi knobby22

yes :iagree: with you in that risk can be subjective and difficult to quantify.

but one simple example of measuring risk I can give (in keeping with KISS )is calculating the potential reward to risk ratio as part of whatever other criteria you might have that have to be met before a buy signal is generated.

eg...say on a chart the current shareprice is 106c and the nearest historical support is at 100c and the nearest historical resistance is at 110c.

Personally I like the current share price to have a potental reward:risk ratio of at least 2.0 before I would buy.

And so in the above case the potential reward is 110 - 106 = 4c
and the potential risk is 106 - 100 = 6c

So the potential reward:risk ratio in this case = 4/6 = 0.666 and well below my 2.0 minimum.

But of course all this depends on where you interpret support and resistance levels and what minimum reward:risk value you choose.

Now you can expand on this concept by including other criteria for a buy signal and weighting them according to whatever relative importance you place on them........eg......you might be using a combination of tests including say the MACD and stochastic indicators, volumes, chart patterns and/or any other criteria you like.

At any point in time you could then assign a value of 1 or 0 to each test depending on whether the criteria is saying buy or not, weighting them to their relative importance and then summing up the results of each test to come up with a final score. Basically it's the concept I use in my fundamental's test. To rate the stock an overall buy the sum of the weighted test results would have to add up to at least 50, 60, 70% or whatever you feel comfortable is an acceptable level to minimise the overall risk for the trade/investment. Now imo the cutoff parameters you use for the reward:risk ratio and the weights and sum of the weighted test results can really only be reliably obtained by paper trading or other form of simulation until consistant acceptable results are achieved.

Imo the sum of the weighted test results is to some extent quantifying the overall risk according to your personal parameters - all the required number crunching for the above examples can easily be set up in a spreadsheet. Doing all this by hand would be very tedious and time consuming.

hope this helps

bullmarket

 

[Julia]

Tech

Interesting thread - thanks for starting it.

For me risk is relative to my level of capital. If I were under-capitalised I would be extremely conservative in my investments. That is neither right nor wrong, but simply reflects my attitude towards always ensuring that I can support myself. If I had, say, only the bare minimum with which to generate enough income to live on, then I would be very risk intolerant.

Julia

 

[sails]

When you mention Risk most peoples eyes glaze over. I know mine did.

But whether youre in Business,Property,Just going about daily life or trading---RISK is constantly there.

For me its a pet topic,some years ago I learnt the risk of not understanding RISK.

Recognising,understanding,quantifying and making Risk work for rather than against you will be the single most positive thing you can do for your endeavours in creating financial security.

I wont have the time nessesary to devote to the topic this weekend but will return to discuss when I can. In the meantime I'm hopefull that this may generate some constructive discussion.

Hi Tech,

Appreciate you starting this thread. Taking on risk would have to be my biggest hurdle in trading and I need to beat it, re-direct it, or something... Would really like to hear your thoughts when you have time...

Thanks,
Margaret.

 

[dutchie]

Bullmarket

That soup must be off by now.

Cheers

Dutchie.

 

[bullmarket]

hi dutchie

Bullmarket

That soup must be off by now.

Cheers

Dutchie.

I think you're right - thought it was starting to taste a little funny but couldn't work out why

I think I'll change that saying to 'see you in the swamp'

Have a nice evening and remainder of the weekend.

bullmarket

 

[dutchie]

Bull

I think being in the swamp would be riskier than being in off soup!



WayneL

What is "the risk" in selling a put (for expectancy calculations).

I would assume it is the strike price minus the premium.


Cheers

Dutchie

 

[wayneL]

I've taken some posts out of this thread, this is too good a topic to have to close down. There is an "ignore" function on this board so if someone "gets on your goat", you don't have to read their responses

I sincerely hope no-one takes offence, and certainly none is intended. I'm just doing the job as best I can.

Cheers

 

[wayneL]

WayneL

What is "the risk" in selling a put (for expectancy calculations).

I would assume it is the strike price minus the premium.


Cheers

Dutchie

Dutchie

The pure risk in a written put is similar to an eqivalent number of shares, except that you have recieved the extrinsic value of the option as premium.

Therefore the risk is less than the equivalent share position.

However, the reward is capped and this must be taken into account when estimating risk verses reward and hence expectancy.

Each case will be different, depending on strike and expiry selected, volatility issues, and all those good things

Cheers

 

[wayneL]

Dutchie

The pure risk in a written put is similar to an eqivalent number of shares, except that you have recieved the extrinsic value of the option as premium.

Therefore the risk is less than the equivalent share position.

However, the reward is capped and this must be taken into account when estimating risk verses reward and hence expectancy.

Each case will be different, depending on strike and expiry selected, volatility issues, and all those good things

Cheers

Going on a bit, often written puts are described as having unlimited risk. Therefore straight shares, must also have unlimited risk. (It's not actually unlimited because you can't go past zero, but it is unquantifyable)

This is why folks use stops. Put writers can also use stops.

The difference being, shares also have "unlimited reward", whereas puts have a limited reward...sometime markedly so if IV's are very low.

Cheers

 

[It's Snake Pliskin]

Risk is amiguous in the classic sense. We can use nouns or adjectives to talk about it. What is it? Most don`t know, yet say "..it`s risky.." How many people say that to you when you tell them you trade stocks? Heaps I bet.

Determining where the risk may be present is paramount. What risks are there?
The risk of buying too high, not buying, making decisions on fundamantals or technicals, the risk of a company going bank rupt, the risk of a company falsifying reports etc, the risk of war, the risk of your computer blowing up etc etc.. Then we can look at the risks associated with your lack of psychological understanding. How does that affect one`s buying and selling, decision making etc? Is one risking too much on a trade? Is one risking too much due to leverage? Is one believing the higher the risk the higher the reward?

It goes on.......

 

[It's Snake Pliskin]

I mitigate investment risk through diversification and fundamental analysis (as I described in other threads).

I mitigate my risk to LPT's by restricting myself to those that meet my criteria which include having no or very little exposure to property development, good quality tennants with long average lease expiry times and price/NTA in the 1.0-1.10 range.

I'm now starting to also look at trusts that invest in the European property market for extra diversification and spread of risk.

cheers

bullmarket

Diversification is fine if done properly as part of a risk management strategy. The correlation of holdings, positions should be known to understand the risk being carried. If your positions are highly correlated then you are taking on too much risk. All positions behave alike increasing your drawdowns for example.

A way of mitigating this is too take some different holdings that may be construed as "risky" or "riskier" positions - once again ambiguous, but able to be determined. For example: having positions whose performance has no effect on other positions.

What one does not want to listen to and believe is that while one is going down it`s ok because the other is going up. Foolish and costly in my opinion. c:

Cheers

 

[It's Snake Pliskin]

Tech

Interesting thread - thanks for starting it.

For me risk is relative to my level of capital. If I were under-capitalised I would be extremely conservative in my investments. That is neither right nor wrong, but simply reflects my attitude towards always ensuring that I can support myself. If I had, say, only the bare minimum with which to generate enough income to live on, then I would be very risk intolerant.

Julia

Yes, looking at one`s stage of life could impact on the risk levels taken. :cup:

 

[bullmarket]

Hi Snake

re your comment:

Diversification is fine if done properly as part of a risk management strategy.

yes I agree with you and the jist of the rest of the post I quoted from.

Imo that is what managed funds try to do, at least to some extent, in addition to their other objectives for the fund when they invest in Australian shares, OS shares, property, bonds, fixed interest and cash.

In my personal case I am starting to look at property trusts that invest in the European commercial, industrial, retail and leisure property markets because from what I am seeing the prospective yields are about the same as trusts I am invested in that invest in US property atm and a little higher than what the LPT's in Australia are averaging atm.

Also, since my number 1 priority is income nowadays I personally don't mind if one goes up a bit while another goes down. Obviously I'd like all my investments to be going up at the same time all the time but that is just not going to happen and I certainly don't want to be spending hours on end doing research and analysis trying to find which sector/region etc is most likely to fire and risk getting it wrong. Mrs bullmarket already thinks I spend too much time on the pc as it is

I (and more importantly mrs bullmarket ) are happy with the returns/income we are getting as they are meeting our objectives and I am reasonably confident that in say 5-10 years time the LPT's I am invested in will be higher in value, everything else being equal - how much? only time will tell but it's not my first priority.

cheers

bullmarket

 

[tech/a]

Do you honestly think trading various portfolios/or futures/or shares/or different groups of shares is Risk Management or even a form of risk management?

If I go to a Blackjack table and play blackjack for 2 hrs then play another 4 types of games say Craps,two up,Roulette,poker,I have in some way employed risk management through diversification?

Do you honestly believe that by trading 10 stocks rather than 1 that your risk has been mitigated?

If you drive a car every single hour of the day you LESSEN the risk of accident even though you change vehical every hour?

Do you believe that there is risk in jumping out of a plane with NO parachute?
Well risk is ZERO as you KNOW what will happen---you have absolutely NO doubt as to outcome.

Now Ive had enough of the lack of support from ASF and have mailed them accordingly--I'm also sick of Patronising from people who have little more than basic knowledge.
So I will watch with amusement as the un educated---educate.