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Author: Jacko2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46814  
Subject: Re: Merck and the Value of Half Date: 10/8/2004 2:12 PM
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AnandaVar:

You're quite correct in pointing out opportunity cost. That's the formal way to quantify the risk. By "completely" at risk, I simply meant that while you're holding a stock there is some chance that the stock price may fluctuate downwards, even to zero. And if we get more accurate, we'll acknowledge that even cash (so-called, for most of us we're talking about an electronic entry on some institution's computer system, which is a whole other kettle of fish) isn't free of risk. It just has different risks.

The other point you raise, also correct, is one we're all familiar with and no doubt apply daily to our investments: diversification, to reduce one's risk (unwanted downward price fluctuations of indefinite duration). Graham pointed out that diversification is corollary to the margin of safety principle. None of us knows the future.

And portfolio theory also tells us that risk (which it defines as price volatility; I acknowledge the criticisms of that definition) can be reduced by prudent diversification (efficient frontier).

And in one of my ports, I use the cash/stock diversification system thought up by Robert Lichello: www.aim-users.com. And read his book. But the basic idea is that you retain a cash cushion for any given stock position (or portfolio) that is used to buy more if the stock drops; and then you sell as the stock rises a certain amount.

jacko2

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