Risk and stock investment

All investments as we very well know involves some kind of risk. It has also been said that the higher the risk the higher the returns. Risk is therefore a factor that cannot be pushed aside once embarking on any business investment of any sort. I once told a group of people that business can also be referred to as risk and the level to which you make progress depends on the level to which you reduce the risks.Similarly, stock investment is also risk and the level top which to grow your portfolio or make gains depends on the level to which you mitigate risks.

How you as an investor defines risk would be quite different from the definition of the man standing next to you. Your definition therefore is meant to give you an insight as to the kind of investor you are. This also implies that what might work for you might definitely not work for your neighbor or brother as the case may be and vice versa.

For some, risk is defined as owning only a few investments and as such they diversify. They buy a few of a lot instead of owning a lot of a few. I have been there before. For others, risk is determined by how much the value of an investment will swing. Consequently, they go for low volatility investment like bonds or treasury bills which give an appearance of low risk. The list goes on and on. Risk however as defined by world renowned Warren Buffet is “not knowing what you are doing”.

For most people that diversify, they do so out of ignorance. If you as an investor takes time to study and understand a business and consequently obtain their shares at attractive prices, then you would want to buy more of what you understand. One key factor that investors must have is a margin of safety with all investments. Reckless speculating with low probability of return is no different from going to casino and gambling.

Buying stocks because you feel you have the money is also risky. Holding your money without buying can be the best form of investment activity sometimes. Think about it.