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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 464871  
Subject: Defining risk Date: 7/13/2014 12:42 PM
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As an individual investor and, then later as a professional advisor, I have wrestled with the definition of the word "risk" as it applies to one's investments.

In a recent comment on another thread, Wendy said (in part) the following: A portfolio can be less risky (that is, its beta can be reduced) IF the assets are not correlated.

Embedded in this comment are two of the main paradigms that seem to be the accepted Street wisdom on defining "risk": Beta and asset correlation.

I have a real problem with using Beta to define risk. Mainly, I guess, because I think more like an owner of an enterprise rather than as a trader of vehicles. As an owner of a business, it really doesn't matter much to me if Mr. Market is manic one day or week or month and depressive the next corresponding period. It might matter if I see either the manic or depressive influence take the price to the enterprise to levels of valuation where they are (by me) considered so absurd that I am almost forced to act (sell or buy more, depending).

The problem I have with correlation is several fold: first diversification of assets just so that I have money divided among supposedly uncorrelated (or lowly correlated) investment vehicles may be either brilliant or stupid depending on timing. Remember in 2008-9 all assets were proven to be correlated, so that should give some of the staunch asset allocators pause for thoughtful reflection as to the merits of the underlying thesis. So asset allocation leading up to that period may be considered of dubious merit.

If one is such that they do their own homework and are constantly on the prowl for mispriced opportunities, then asset diversification generally occurs over time and I tend to think of this type of diversification as more toward the smarter side of the allocation process.

However, if one doesn't know enough to do their own research, and depends on "professionals" to provide their allocation models, since 80% of "professionals under perform the benchmark index against which their performance is measured, I would consider this to be on the less smart side of the equation.

I have been participating in the board (with several periods of pulling away from the Fool altogether) for quite a few years. I do not remember having any detailed discussion of how we each and, perhaps, collectively define the last word of our boards name: "Risk".....does it have a different definition for individual portfolios than it does for macroeconomic trends? If so, should we state which definition or context we are using in any given thread?

Poz
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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454826 of 464871
Subject: Re: Defining risk Date: 7/13/2014 3:11 PM
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Poz, thank you for opening a discussion which can be potentially illuminating. You brought up several points, including:

1. "I think more like an owner of an enterprise rather than as a trader of vehicles." According to the classic definition of Ben Graham, this makes you an "investor" rather than a "trader." I am an investor like you, but some Fools are traders.

2. "Remember in 2008-9 all assets were proven to be correlated, so that should give some of the staunch asset allocators pause for thoughtful reflection as to the merits of the underlying thesis." All assets have been correlated after the crisis because of Federal Reserve suppression of interest rates and quantitative easing. Contrary to pre-crisis free-market conditions, bonds and stocks rose together to unusually high valuations. However, during "normal" free-market conditions, stock and bond prices are usually negatively correlated (stocks rise while bonds fall and vice versa) so portfolio swings are dampened.

3. "If one is such that they do their own homework and are constantly on the prowl for mispriced opportunities, then asset diversification generally occurs over time and I tend to think of this type of diversification as more toward the smarter side of the allocation process." This is smart.

< "Risk".....does it have a different definition for individual portfolios than it does for macroeconomic trends? If so, should we state which definition or context we are using in any given thread?>

When I mentioned beta (standard deviation relative to a benchmark) and asset correlation, I was following commonly published portfolio theory. As you know, research shows that managed portfolios often do worse than the indexes, which is why a low-cost index fund may be best for most stock investors.

When I post a Control Panel, I implicitly address risk by showing many market and macroeconomic variables that have been correlated with market movements in the past.

I think that risk does have a different definition for individual portfolios than it does for macroeconomic trends. Each of us has a different life situation. Each of us has a different emotional tolerance for negative numbers.

A person who is still earning is in a different position than a person who does not have an income (especially a retired or disabled person who does not receive Social Security or other regular income).

A person with a large amount of cash can handle sudden emergencies, while a person without a large amount of cash may need to sell assets at a bad time should the need arise.

A person with heirs may want to maximize an estate, while a person without heirs (or who doesn't care about their heirs) may want to minimize risk during their lifetime without caring whether their estate is completely depleted when they die. It may be more important to comfortably cover expenses over a lifetime even if the lifestyle is modest and the estate isn't maximized. I hope you don't think I'm a heretic when I say that it might not be essential to maximize results.

A person who feels very, very bad when investments go down has an emotional reaction that may supersede the numbers. This may cause an investor to bypass opportunities. A person who feels elated when investments go up has an emotional reaction that may supersede the numbers. During bull markets, elated investors can take on more risk than they realize and can be hurt during the inevitable downward part of the cycle.

As Jeff has said many times, cash is an important asset even though it loses value at the rate of inflation. (Cash-equivalent investments, like insured term deposits, reduce this risk as long as enough liquidity is maintained.)

The opportunity cost of holding cash (which may open later opportunities during the inevitable future downdraft) may be less than the actual losses sustained during downdrafts if the investor is forced to sell.

It is important to realize that ONLY CASH IS CASH in the event of an emergency. An opportunity cost is not the same as an actual loss.

What is right for one is not right for another. What is an acceptable to one may be unacceptable to another.

I would like to hear what other METARs think.
Wendy

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454829 of 464871
Subject: Re: Defining risk Date: 7/13/2014 4:22 PM
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Wendy

When I mentioned beta (standard deviation relative to a benchmark) and asset correlation, I was following commonly published portfolio theory.

The Capital Asset Pricing Model (CAPM) when I studied it sounded like academia rather than the common sense outcomes that the market teaches. Now with Central Bank interventions, what is the "risk free" rate? Is it the non-market rate pre-determined by the Central planners....er...bankers? Or is it something that doesn't exist until after a market cleansing experience of some sort which reduces the central banker input?
http://en.wikipedia.org/wiki/Capital_asset_pricing_model

It's follow-on successor Modern Portfolio Theory (MPT) smacks again of academia trying to formulate how the market should react rather than describing how it does react.
http://en.wikipedia.org/wiki/Modern_portfolio_theory

Both notions CAPM & MPT, eventually converge in a sense by having the "risk free" rate of return as an important factor in one and defining the "efficient frontier" in the other. This, for me, makes both equally useless in an environment where "risk-free" cannot be determined.

I think that risk does have a different definition for individual portfolios than it does for macroeconomic trends. Each of us has a different life situation. Each of us has a different emotional tolerance for negative numbers.

I disagree with a part of that statement. The definition of risk is the same regardless of the individual(s). The tolerance for volatility in assets comprising a portfolio may be different for different circumstances and personalities (IMO, personalities plays a bigger role than circumstances). Again we are conflating risk and volatility.

Risk, to me, is the danger of a permanent loss of some portion of my investment assets. Volatility is a change in the market value over some period of time.

I, too, would like to hear/read what each participant (and lurker) here thinks as to whether there is a difference between the definitions of the two words "risk" & "volatility" and, if so, what it might be and how that difference is factored into their portfolio composition decision making.

Poz

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Author: StoppedClock Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454830 of 464871
Subject: Re: Defining risk Date: 7/13/2014 4:44 PM
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Remember in 2008-9 all assets were proven to be correlated, so that should give some of the staunch asset allocators pause for thoughtful reflection ...

I believe treasury bonds, especially long-term treasuries, moved approximately inverse to stocks and most other assets, during the darkest parts of late 2008 and early 2009. But treasuries seem expensive now, so that may not work for the next big drop (if it comes).

Another uncorrelated asset class in 2008-2009 was options, which became very expensive. Before that crash, one could have bought a mix of puts and calls that was market-neutral, and done quite well when the market crashed and volatility increased.

Now, in July 2014, most asset classes look very expensive again, including treasuries. But options are very cheap again (so covered calls are very unattractive now). Maybe its a good time to buy a mix of long-term puts and calls, and sell just enough shorter term options to cancel out most of the time decay of the long-term options. Essentially calendar spreads, with an over-emphasis on the long put component.

Anyway, most of my savings are in stock index funds, in my workplace retirement plan, which doesn't have enough good choices to diversify. I'm using options spreads for diversification, since these look like the most obvious cheap asset class now.

Stopped Clock

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454831 of 464871
Subject: Re: Defining risk Date: 7/13/2014 6:54 PM
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I believe treasury bonds, especially long-term treasuries, moved approximately inverse to stocks and most other assets, during the darkest parts of late 2008 and early 2009.

You are correct, the price of the 30 year Treasury bond rose during the period you mention.

Another uncorrelated asset class in 2008-2009 was options, which became very expensive.

Which kind of options? Stocks, futures, etc. and which way would have protected you: puts or calls and how far out of or into the money and how long in time; and how would you know before the events unfolded? With market volatility being a part of the Black-Scholes formula for options pricing, it is not surprising that the increased volatility raised the premiums....but which way would you have been uncorrelated to the volatility in that scenario?

How do you define risk and volatility or are they different much at all in your market view?

Poz

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454834 of 464871
Subject: Re: Defining risk Date: 7/13/2014 7:59 PM
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<I believe treasury bonds, especially long-term treasuries, moved approximately inverse to stocks and most other assets, during the darkest parts of late 2008 and early 2009.>

The price of Treasuries didn't move as much as stocks or corporate bonds in late 2008, but they did decline due the credit crunch, causing interest rates to rise modestly. The price of the TIPS (Treasury Inflation Protected Security) dropped like a stone, causing the yield on TIPS to be higher than the yield on Treasuries for the first time ever. (I have tracked this closely for many years.) I bought a lot of TIPS in late 2008 and also posted this on METAR.

http://research.stlouisfed.org/fred2/series/DFII10
http://research.stlouisfed.org/fred2/series/DGS10
http://research.stlouisfed.org/fred2/series/DGS30

The Federal Reserve later acted strongly to suppress interest rates.

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Author: jaroman Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454835 of 464871
Subject: Re: Defining risk Date: 7/13/2014 8:03 PM
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I agree we cannot determine the "risk free"rate of return in this enviornment; however we must use the time tested formula, as that is what market participants are using.

For my situation and personality, since you asked, I have been carrying more cash than I normally would, simply b/c I can no longer handle the potential volatility in NAV and accept the risk that I am losing a percentage of my purchasing power. Also carrying more preferred stock than I ever dreamed.

I remind myself almost daily that I do not have to "beat the market" and opportunity cost is what helps me sleep at night.

It is the still lingering fear of the "end of the monetary world" as we know it that scares the sh-t out of me.
My portfolio cannot be protected from that. That is MACRO risk to me.

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Author: StoppedClock Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454836 of 464871
Subject: Re: Defining risk Date: 7/13/2014 8:12 PM
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Which kind of options? Stocks, futures, etc. and which way would have protected you: puts or calls and how far out of or into the money and how long in time; and how would you know before the events unfolded? With market volatility being a part of the Black-Scholes formula for options pricing, it is not surprising that the increased volatility raised the premiums....but which way would you have been uncorrelated to the volatility in that scenario?

I'm using essentially a straddle on SPY, buying approximately equal numbers of at-the-money calls and puts, with expirations in 2016, which is far enough in the future so that time decay of the options is slow. I also sell a much lesser number of out-of-the-money puts and calls with expirations in a few months, to collect a little time decay, to somewhat reduce the effect of time decay on the straddles. But in total I'm buying more options than I'm selling.

So in option speak, the total position is delta neutral (market neutral), theta negative (small loss from time decay), and very positive gamma (big gain if volatility increases). I win if the market moves significantly up or down, and slowly lose if it just sits there.

Its essentially insurance. I usually hate to pay for insurance, but I think that options prices might be irrationally cheap now. Its the only cheap liquid asset I am aware of. So I am happy to buy underpriced insurance, especially since the insurance itself is a liquid asset.

I really just want to have an investment that would do well if my regular stock index fund investments get hammered. 2008-2009 was depressing, and I don't want to repeat it.

Cheers,

Stopped Clock

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Author: MrCheeryO Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454839 of 464871
Subject: Re: Defining risk Date: 7/14/2014 1:14 AM
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Brk. 2003
...In our opinion, the real risk that an investor must assess is
whether his aggregate after-tax receipts from an investment
(including those he receives on sale) will, over his prospective
holding period, give him at least as much purchasing power as he
had to begin with, plus a modest rate of interest on that initial
stake. Though this risk cannot be calculated with engineering
precision, it can in some cases be judged with a degree of accuracy
that is useful. The primary factors bearing upon this evaluation
are:

1) The certainty with which the long-term economic
characteristics of the business can be evaluated;

2) The certainty with which management can be evaluated,
both as to its ability to realize the full potential of
the business and to wisely employ its cash flows;

3) The certainty with which management can be counted on
to channel the rewards from the business to the
shareholders rather than to itself;

4) The purchase price of the business;

5) The levels of taxation and inflation that will be
experienced and that will determine the degree by which
an investor's purchasing-power return is reduced from his
gross return.

These factors will probably strike many analysts as unbearably
fuzzy, since they cannot be extracted from a data base of any kind.
But the difficulty of precisely quantifying these matters does not
negate their importance nor is it insuperable. Just as Justice
Stewart found it impossible to formulate a test for obscenity but
nevertheless asserted, "I know it when I see it," so also can
investors - in an inexact but useful way - "see" the risks inherent
in certain investments without reference to complex equations or
price histories......
http://www.berkshirehathaway.com/letters/1993.html

I like his two references to purchasing power which sometimes seems to be ignored even though it has been 14 years since the S&P 500 recorded it's previous real high. The main risk (and opportunity) is that the equity markets can become disconnected from fundamentals for very long periods of time, Buffett demonstrates that elsewhere, and could well get another 10-15 years of close to a 0% real rate of return on the index, forgetting anything about Bubbles, from the previous high. Of course one hopefully has been accumulating at lower prices over those fourteen years but a 25-30 year run of close to 0% real return for the index introduces the risk of time. Anyone only has so much time to accumulate.

He also mentions management twice. How many individuals really spend much time at all focusing on management? Buffett knows these people intimately and Cramer spends a lot of time on managements. He also knows these people well. I doubt if the average investor does.

Can't do better than Buffett, imo. Or better than Charlie Munger on the trade known as economics.

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Author: jgc123 Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454841 of 464871
Subject: Re: Defining risk Date: 7/14/2014 8:58 AM
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Wendy:

"I think that risk does have a different definition for individual portfolios than it does for macroeconomic trends. Each of us has a different life situation. Each of us has a different emotional tolerance for negative numbers."

And that is why I personally include EVERYthing in my personal risk/reward analysis.

1. my health
2. my degrees
3. my job
4. my spouse's health/degrees/job
5. cash
6. stocks/bonds in sheltered accounts
7. stocks/bonds in non sheltered account
8. home/beach house

1. My primary investment is still my health. I still run 10-15 miles per week, no more than 5 runs per week at an 8:30-10 minute per mile pace because mega studies by James H. O'Keefe and others indicate that this level of exercise is associated with greater health benefits than those who exercise more or less than that. http://heart.bmj.com/content/early/2012/11/21/heartjnl-2012-...

2. I switched to a diet heavy in vegetables, fruits and whole grains and got by blood readings in line over the course of the last 20 years.

3. My philosophy degree and law degree enable me to continue to earn a living and to save and invest while the markets go up, down and sideways.

4. My job. I continue to work partly because market uncertainties incent me to keep working despite reaching financial goals that I thought would have allowed me to retire when I started out 34 years ago.

5. I accumulate cash because of market uncertainties and uncertainties re: age, jobs and health.

6. I max my sheltered accounts but they are aggressively allocated because I can afford to lose money over the short term because I still work, take care of myself and save cash and because I still have a long term investing horizon after 30 years of investing.

Repeat number 6, above, because that is the one that matters. That is the point of my post. I can be really aggressive with my sheltered accounts even though I am VERY risk averse because I have continued to work, save and take care of myself.

7. I am now adding furiously to my sheltered investment account because it is lagging and because my sheltered accounts will not necessarily be enough for a comfortable retirement. I can do this because I take care of myself and continue to work full time.

8. I paid off my home and can pay off my beach house with savings if necessary because I continue to take care of myself, work and save.

I rarely talk about risk on a message board setting because on a personal level it really includes all of the factors listed above, and more.

My investments appear to be quire risky because they are still heavy in equities in a rich market. In my case they are not that risky because my stocks could again lose half their value and I would still be working, saving and investing just like I did in 1987, 1999-2000, and 2008-9.

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Author: JLC Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454842 of 464871
Subject: Re: Defining risk Date: 7/14/2014 9:53 AM
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"Risk".....does it have a different definition for individual portfolios than it does for macroeconomic trends?

Yes.

Risk is like inflation, very individualistic. In relating to portfolios, mostly dependent on one's time horizon. Both when one will draw from the portfolio and estimated length of time of drawdown.

Macroeconomic trends can last much longer than any portfolio.

JLC

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Author: whafa Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454843 of 464871
Subject: Re: Defining risk Date: 7/14/2014 9:58 AM
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It is the still lingering fear of the "end of the monetary world" as we know it that scares the sh-t out of me.
My portfolio cannot be protected from that. That is MACRO risk to me.



Since there is nothing you can do about that, it is pointless to be worried about it. If the monetary world ends, your portfolio will be the least of your worries. In the mean time, try not to worry about things you can't control.

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Author: tim443 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454844 of 464871
Subject: Re: Defining risk Date: 7/14/2014 10:34 AM
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Risk is like inflation, very individualistic. In relating to portfolios, mostly dependent on one's time horizon. Both when one will draw from the portfolio and estimated length of time of drawdown.

...

try not to worry about things you can't control.




Now I'm worried!!!

It just occurred to me I don't have a drawdown plan!!! }};-O

I had put aside money from my pension income for our trip to Cuba in the spring and the "kids" gave us cheques for Xmas that more than covered it...so I added the saved money to the TFSA accounts. }};-O


Tim <If the only people planning to show up at your funeral are those that want to confirm your demise you may be doing something wrong?>

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454852 of 464871
Subject: Re: Defining risk Date: 7/14/2014 1:11 PM
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It is the still lingering fear of the "end of the monetary world" as we know it that scares the sh-t out of me.
My portfolio cannot be protected from that. That is MACRO risk to me.


First, I'm not so sure that "ending the monetary world as we know it" would be such a bad thing. Getting rid of corrupt practices; corporate fines paid out of shareholder's pocket with no corporate officer held liable; ending the front-running of trades; wringing out the risk taking by Federally insured entities; etc. would provide a good opportunity to modernize and simplify both the regulatory agencies and the regulations which guide the industry.

As far as "money" itself....that won't end, if one style goes out of favor suddenly there are already well-developed plans in place to virtually seamlessly switch from the old to the new.

However, if the fear of a monetary collapse still is haunting you, I disagree with not being able to protect your assets in such an eventuality. History has shown repeatedly that productive land, and ownership of businesses which will do business in good times or bad (take the stock market in Weimar Germany for example: http://www.businessinsider.com/heres-what-happened-to-stocks... ), are decent hedges against total loss or even long-lasting loss. [I have other ideas as to how to protect oneself, but they have been stated here and other places often enough that to repeat them would be pointless]

Poz

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Author: knighttof3 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454856 of 464871
Subject: Re: Defining risk Date: 7/14/2014 2:29 PM
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I would like to hear what other METARs think.

I largely agree with you, though my understanding is that MPT does distinguish between an individual's willingness to take risk (the emotional reaction that you mention) and their ability to take risk (person without income, vs person with limited fixed income, vs person with high regular income like a tenured professor, vs person with high lumpy income like a salesperson.) Willingness + ability equal risk tolerance. All this agrees with common sense.

What doesn't is, as Pos pointed out, the CAPM way of measuring risk. A high beta stock does not equate to higher returns, as you pointed out. And correlations change, as do characteristics of individual securities and even of markets themselves. So there is no accepted way of measuring risk itself. CAPM substitutes overall volatility as a measure, which is OK, but hardly as predictable as theorists would have us believe. The efficient frontier is extremely unstable and can recommend a wild variety of portfolio mix, making it useless for practical application.

In the end, the approach that does work over and over seems to be valuing the securities independently by yourself, however imprecisely; and parting with your hard earned cash only when you think the margin of safety is enough. You don't know WHEN good things will happen to your investments but at least you can be certain THAT they will happen.

This is a lot of work, and a perfectly reasonable alternative is DCA into the broadest legit market (i.e. stocks, bonds, real estate; not coke cap collections or ultra-specialized ETNs.) Zero alpha, one beta, many hours free of worry.

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Author: sailrmac Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454858 of 464871
Subject: Re: Defining risk Date: 7/14/2014 3:12 PM
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Hi Poz,

I think of risk in two ways:

1.) The risk of the portfolio declining in value. This can be thought of as maximum portfolio drawdown. Maybe I shouldn't care about this as long as the portfolio still meets my needs, but I do.

2.) The risk that the portfolio will not meet my needs is probably the more valid risk. This definition encompasses issues like inflation. It teaches that I shouldn't care much about price fluctuation as long as my long term income needs are met. This in my opinion is the better definition of risk, even though emotionally I can't help it, I still care about #1.



Moreover, because emotionally I do pay attention to risk #1, it becomes a real risk. It can and has kept me up at night. It can cause me to make less than optimal decisions. Therefore, I have to either get over it completely (not going to happen), or expect and counteract it where possible (mechanical investment, money management strategies, etc.). Overall, it has to be taken into consideration.

The standard definitions of risk like volatility, correlation coefficients and beta are useful because they can be written into software and utilized as tools. They can help us design portfolio's which reduce the risks we really care about, risk #1 and #2 above.

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Author: WilliB Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454859 of 464871
Subject: Re: Defining risk Date: 7/14/2014 3:15 PM
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As far as "money" itself....that won't end, if one style goes out of favor suddenly there are already well-developed plans in place to virtually seamlessly switch from the old to the new.

Hey, Pos, could you post a link if there are any? This is a long-standing interest of mine.

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454861 of 464871
Subject: Re: Defining risk Date: 7/14/2014 3:48 PM
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WilliB

Hey, Pos, could you post a link if there are any? This is a long-standing interest of mine.

James Rickards has talked about currency wars and the replacement of the reserve currency, if it ever failed, many times on radio and video podcasts. He has even written some books on the topic, one of which (Currency Wars) I've read, but found it less than satisfying in that I think he could/should have developed his fast-paced start into a better ending. I have not read his second book "The Death of Money" yet....too many others in the cue already, but will eventually get a round tuit.

Here's a Wiki write-up on him:
http://en.wikipedia.org/wiki/James_G._Rickards

Poz

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Author: OrmontUS Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454864 of 464871
Subject: Re: Defining risk Date: 7/14/2014 5:26 PM
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In the more esoteric realm, the biggest risk I face is acting out of the irrational drive of my own emotions.

Jeff

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Author: JLC Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454866 of 464871
Subject: Re: Defining risk Date: 7/14/2014 6:04 PM
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I think of risk in two ways:

It all depends on how you draw out from your portfolio as to which of your risk definitions are more important.

It sounds like you are set up to live off the dividends/interest your portfolio generates. Therefore, the overall value of your portfolio doesn't matter as much so long as the income is generated. (This is how I mostly plan to operate too).

However, if someone were to take out X% each year, then a declining portfolio value is way more important.

And thus we are back to "risk" being very individual.

JLC

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Author: TMFbuild Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454871 of 464871
Subject: Re: Defining risk Date: 7/14/2014 8:09 PM
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I define risk as the probability to lose principal amount. When I invest into a stock, the things I am cautious about are company getting bankrupt, products going out of fashion/demand, services becoming obsolete, fraudulent practices, incompetent management. If a safe business is one which can withstand meltdown, competition, new player entry, changing consumer behavior, the risky one will be the one which fails in any one of these challenges. Ultimately, the chance that a firm may not be able to return its shareholder’s money is what I will call risk.

Cheers,
Rana

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454882 of 464871
Subject: Re: Defining risk Date: 7/15/2014 1:17 AM
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Poz:

In the Ivory Tower risk is volatility as measured by beta. On the street, risk is losing your money.

Crashes happen when the uncorrelated correlate but this cannot be classified as risk proper but as uncertainty. According to economist Frank Knight risk is that which can be calculated. The rest is uncertainty, for example black swans.

I found this text by Frank Knight very enlightening:

Risk, Uncertainty, and Profit

Part I
INTRODUCTORY
Part I, Chapter I

The Place of Profit and Uncertainty in Economic Theory


I.I.25
Our preliminary examination of the problem of profit will show, however, that the difficulties in this field have arisen from a confusion of ideas which goes deep down into the foundations of our thinking. The key to the whole tangle will be found to lie in the notion of risk or uncertainty and the ambiguities concealed therein. It is around this idea, therefore, that our main argument will finally center. A satisfactory explanation of profit will bring into relief the nature of the distinction between the perfect competition of theory and the remote approach which is made to it by the actual competition of, say, twentieth-century United States; and the answer to this twofold problem is to be found in a thorough examination and criticism of the concept of Uncertainty, and its bearings upon economic processes.

I.I.26
But Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term "risk," as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. The nature of this confusion will be dealt with at length in chapter VII, but the essence of it may be stated in a few words at this point. The essential fact is that "risk" means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. There are other ambiguities in the term "risk" as well, which will be pointed out; but this is the most important. It will appear that a measurable uncertainty, or "risk" proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term "uncertainty" to cases of the non-quantitive type. It is this "true" uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition.

I.I.27
As a background for the discussion of the meaning and causal relations of uncertainty, we shall first make a brief survey of previously proposed theories of profit. After a summary glance at the history of the treatment of the subject down to recent decades, it will be necessary to dwell at slightly greater length upon the controversy recently carried on in connection with the explanation of profit in terms of risk. The crucial character of the distinction between measurable risk and unmeasurable uncertainty will become apparent in this discussion.


http://www.econlib.org/library/Knight/knRUP1.html#Pt.I,Ch.I


Denny Schlesinger

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Author: namkato Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454883 of 464871
Subject: Re: Defining risk Date: 7/15/2014 1:27 AM
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later as a professional advisor,
================================

Wondering what the satisfaction level is for your clients; do they see markets going up all around them and wonder why they are not keeping up? Are they satisfied with perpetual excuses about risk? Do they want their fair share of reward?

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454891 of 464871
Subject: Re: Defining risk Date: 7/15/2014 9:21 AM
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Wondering what the satisfaction level is for your clients; do they see markets going up all around them and wonder why they are not keeping up? Are they satisfied with perpetual excuses about risk? Do they want their fair share of reward?

Keep wondering, you wouldn't believe the answer if I gave it to you, as evidenced by the one-way tone of your inquiry.

In past years (long time ago now) I used to share my personal portfolio results. Then it was pointed out by someone as skeptical as you that I could be just making the numbers up as I went along. I offered that individual to send them a copy of my third-party, internationally known, life of account performance results with account numbers blacked out, but it was on a bet that if I could produce it, then they had to pay me whatever the bet amount was. They declined the offer. But I also stopped mentioning specific percentage results for each year as it did no one any good anyway....except me of course (and those I advise)...

However, I joined a few of the contests that were held on the Foolish Collective board back when that was my regular board. I have since participated in a number of others over the years, some years doing very poorly, other years doing very well. Since the 2003 contest, where I could change my selections, I must admit I have not done nearly as well as that first one.
http://boards.fool.com/funport-2003-final-results-part-1-200...

I have made individual stock calls on the Fool over the years and they, too, have mixed performance, some like Lucent have been horrible, while others like Brigham Exploration and Burlington Northern and a few others have done very well. But in each one of these, I made the call on companies that I owned and said that I owned them. I rarely do that on the highly traveled boards here anymore and expect to do so less and less in the future unless someone brings up a discussion on the company and I happen to own it.

So, to more directly answer your question, overall my clients are very happy. Some of their holdings have done poorly (the precious metals in the last few years have given back some of the gains since I started recommending them in 2004), but some of them have done spectacularly well, and though the clients (on whole) did not outperform the DOW last year, they've done well enough that they are very pleased....to the point where some are recommending new clients while others don't want to share me with anyone else. Personally, I haven't advertised for clients in over 10 years and don't intend to ever advertise for any over the next 10 (should I live so long).

Oh, and in case your mind works the way I think it might, I have never gotten a single client from my participation at TMF, nor have I positioned myself to be open to do that. I've met a couple of Fools on my travels, and talked with a few over the phone and through emails and they all (if they wished) could verify that not once have I asked them for their business. I just wanted to meet, talk, write about common interests and to build friendships with them. Upon refelction, there was one meeting with a Fool who expressed some issues that I offered to help with if they wanted, but made the offer on an informal basis (i.e. I'd look at something and give my input without them having to become a client).....so if one took a particularly stringent definition of soliciting, they'd still have to stretch that into solicitation. I open up the METAR community with whom I've had contact to refute the above if my recollection and theirs differ.

Thank you for asking.

Poz

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454892 of 464871
Subject: Re: Defining risk Date: 7/15/2014 9:27 AM
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TMFbuild

I see "new" next to your name, so welcome to METAR.

Here is what FINRA has to say about risk and, while there are some things I don't completely agree with, it is to these definitions that I must advise clients or be open to penalties:

http://www.finra.org/Investors/SmartInvesting/AdvancedInvest...

Even selecting some of the article would be interpreted by a compliance official as an infraction, so I'll leave it to the reader to see what they say.

Poz

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454893 of 464871
Subject: Re: Defining risk Date: 7/15/2014 9:35 AM
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Denny

I have Frank Knight's book "Risk, Uncertainty and Profit" in my library of to-be-read. Started reading it once and decided his style was too dry for where my head was at the time. [I think I bought it on your recommendation a number of years ago].

I had some serious misgivings about how he was approaching the subject, which also relegated his book to a lower priority. He stays on the list at all because he has an impressive reputation, so perhaps the misgivings were a function of my head-space at the time rather than his arguments, so I'll give it another go at some point....but it will be years from now with the backlog I've accumulated and the slower rate at which I read over time.

Poz

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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454895 of 464871
Subject: Re: Defining risk Date: 7/15/2014 9:46 AM
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I, too, would like to hear/read what each participant (and lurker) here thinks as to whether there is a difference between the definitions of the two words "risk" & "volatility" and, if so, what it might be and how that difference is factored into their portfolio composition decision making.

Risk and volatility are both measures, but they measure different things. Volatility is a measure of the variation in market value of a security over time. Risk is a measure of the probability and impact of a negative outcome in meeting your investment goals.

Risk and volatility are often confused because there is a risk *associated* with volatility just as there is a risk associated with other factors such as inflation or liquidity. In other words, volatility is not synonymous with risk, but it can be a risk factor.

With my portfolio, managing risk is always (okay, mostly always!) guided by a matrix -- my judgment of both the probability and the impact of a negative outcome in meeting my investment objectives. Volatility and liquidity and inflation and other risk factors all play a part in determining that probability and impact. It is situational -- I don't mechanically adhere to a system such as rebalancing. Works for me, but many other good approaches out there.

Thanks,
Ears

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454896 of 464871
Subject: Re: Defining risk Date: 7/15/2014 9:48 AM
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knightof3

There is a .pdf file you may find interesting. I can't provide a direct link because it always opens up as a .pdf! So I did a Google on "Risk is not the same as Uncertainty" to narrow down the field to where on my Google results it was the top one. It is the one that has the URL that reads: www.kamny.com/load/publications/p03.pdf

https://www.google.com/search?q=risk+is+not+the+same+as+vola...

Poz

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454897 of 464871
Subject: Re: Defining risk Date: 7/15/2014 10:04 AM
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Poz:

Reading the excerpt I posted might be enough to illuminate the risk issue. The point is that some things we can measure (risk) and some we can't (uncertainly). How to go about protecting the portfolio is different for each. One good way to protect against uncertainly is to be debt free. If you don't owe anyone anything they can't come to collect and force you to sell stuff at the wrong time at a bad price, what happened in 2008 to "SMART" money.

Denny Schlesinger

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Author: GrandpaRalph Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454900 of 464871
Subject: Re: Defining risk Date: 7/15/2014 10:13 AM
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Poz,

I've met a couple of Fools on my travels,

I still remember the warm welcome you gave us at the airport, after returning from a cruise. If you are ever in Southern Michigan, I'd love to return the favor some day.

Ralph

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454901 of 464871
Subject: Re: Defining risk Date: 7/15/2014 10:45 AM
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Wendy

Here goes,"A person who feels very, very bad when investments go down has an emotional reaction that may supersede the numbers. This may cause an investor to bypass opportunities. A person who feels elated when investments go up has an emotional reaction that may supersede the numbers. During bull markets, elated investors can take on more risk than they realize and can be hurt during the inevitable downward part of the cycle.

Early in my adult life, beginning in 1962, I believed in investing in growth stocks. I also invested in a mutual fund called Keystone S-4 that specialized in start ups that had the best record in the 1950s. By their very nature these are high beta stocks. A fellow by the name of Loeb wrote a book, "The Battle For Investment Survival"* in which he said (as I recall) that you should study stocks until you find one you think will double in a year and buy that. If it drops 10% sell and study some more. You don't have to double your investment many times before you are rich. But 10% swings in growth stocks seem to be common in my experience. *(https://archive.org/details/battleforinvestm00gera)

Somewhere in the early 1970s, I realized that selling every time my stock dropped 10% was taking away markedly from my successes, and I was earning only about 4% that, at the time, I could get on California S&L CDs, But I was slow to learn and, in fact, I pretty much dropped out of stock investing because of a bad experience. A broker I had got me involved in buying on margin. I had an uncle that did this and seemed to do very well so I got sucked in, but in 1972-1973 I was running around the country for NASA and having to answer margin calls at the same time. Eventually I couldn't stand the heat and sold out everything except for BRE and lost my kitty so I had to recapitalize. I quit investing in stocks for a long time so I missed the Reagan stock market in the 1980s.

But after about 40 yrs I changed my tack and found that the only way I could stay in a stock was to invest in those that paid dividends, preferably rising dividends. And this I pretty much have done. But how do you protect yourself from all eventualities?

I like the Fabulous Fifties, those stocks that have increased their dividends for 50 yrs or more like: GPC, 3M, PG, EMR (now there are 19 of these, I believe, of which two have done so for 60 consecutive years but which I don't have.). I fully understand that these streaks are not guaranteed so I do have to keep alert. At one time AON, for example, had a 50 yr streak going but reduced their dividend and has never recovered although the stock has been doing well (They are also in the process of becoming one of the increasing numbers of phony foreign companies). I used to trade EMR, but have decided to stop doing it as the price slowly creeps upward.

I also have pretty much adopted a rule that I should sell a stock that stops raising its dividend and particularly if it lowers its dividend. In the 2008-2009 Armageddon, this got me to sell WaMu (that, of course, went to zero), but I already had taken the biggest loss on a single stock in my investing career. It could have been much worse. My loss of GE was even bigger. I am happy to say, however, that I eventually bought back GE at a price even lower than my selling price and have recovered my loss.

In the tech boom, REITs had the greatest anti-correlation with tech and were being murdered. I thought, property can't go to zero so I started to buy more REITs, a move that has paid off well though no REIT has a 50 yr record of increasing its dividend, though one is now over 40 yrs. I have to admit, I was getting worried in March of 2009.

I also have what I call a CD module for safe money that I must keep up. My 5 and 6% CDs at PenFed are disappearing and being replaced with 2% (Geesh!) except for one early this year at 3% when they were on sale at PenFed.

It is a little hard for me to tell how well I am doing right now because of the $206,000 entry fee to our continuing care facility (selling** some of the stocks was like selling children), and my late wife's desire in her trust to pay off the grandchildren's college loans that consumed another $100,000.

My big winner has been the Vanguard Health Care mutual fund that I have decided to keep at about $50,000 so three times I have withdrawn $5,000 over the last 18 mo. (Currently it is at $51,500). But I also have a big slug of VTR (Ventas), a health care REIT.

In the previous decade, I got involved in corporate or government bonds, but most of these have been called. A couple paying 5% increased in price sufficiently so that I could get 3 yrs of dividend equivalent by selling so I sold them. My TIPS will begin to mature soon, and I should replace these with more bonds. Right now I have no ideas. Both my account and my late wife's trust have the Vanguard TIPs fund that I will keep just in case. I also have a modest number of gold and silver coins just in case.

A lot of the bond money, I have put into preferred stocks that I only started to do in the previous decade. Of course if bond rates go up the value of preferred stocks will probably go down There is a CEF that is pretty safe because they must pay out 10% of their NAV so it gets a high rating of AAA from two of the rating agencies. It is GAB. Currently I do not own any although it is paying a 7.99% dividend. Please note that 10% of NAV can exceed earnings so you may get some return of capital. PSA preferreds are pretty safe because PSA raises money by selling preferred issues and does not borrow money so it is not at the whims of the financial industry. But I do have a lot of a PSB preferred (If UI had to sell this, I would take a loss of maybe $1,000 but I collect the dividends instead) which is almost as safe and my other favorites are TCO preferreds ever since I went to one of their shopping centers. Do not buy preferred stocks on market orders as they are thinly traded. You can get a lot of information on these on the REIT Board or at least look at http://stopcontinentaldrift.blogspot.com/2011/11/preferred-s...

** We were turned down for a home loan by BB&T because of "inappropriate assets" so I decided not to fool around and sold assets to pay for the entry fee.

brucedoe

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454902 of 464871
Subject: Re: Defining risk Date: 7/15/2014 10:58 AM
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GrandpaRalph!

Good to see you! I'd love to hook-up again, but the chances of getting Mrs Poz to Southern Michigan are pretty slim! BTW, I still have the Foolish cap you so graciously awarded me as the prize for that tourney! It will always be fondly remembered.

Poz

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Author: qazulight Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454906 of 464871
Subject: Re: Defining risk Date: 7/15/2014 11:11 AM
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I would have Poz as an adviser if I were not so hard headed.

Cheers
Qazulight

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Author: qazulight Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454908 of 464871
Subject: Re: Defining risk Date: 7/15/2014 11:15 AM
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Wondering what the satisfaction level is for your clients; do they see markets going up all around them and wonder why they are not keeping up? Are they satisfied with perpetual excuses about risk? Do they want their fair share of reward?

Namkato,

From your posting here, I am under the belief that you are in the medical profession. If that is correct, and I were sick, and I knew what hospital you worked at, and I was in that hospital, I would try to escape.

On the other hand. I have seriously considered using Poz as an adviser, in fact, I just realized that some things that kept me from using him are no longer valid. I probably should go ahead and get that done.

Cheers
Qazulight

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Author: flyerboys Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454912 of 464871
Subject: Re: Defining risk Date: 7/15/2014 11:44 AM
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Might it be useful in sharpening the distinction to ask these sorts of questions for any particular investment or action:

"What to do about the uncertainty regarding this risk?"

vs.

"How do I manage the risk of uncertainty?"

?

david fb

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454916 of 464871
Subject: Re: Defining risk Date: 7/15/2014 12:18 PM
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If you follow Knight's reasoning you would not put the words "risk" and "uncertainty" in the same sentence. It tends to confuse "risk" as a synonym of uncertainty with "risk proper." Uncertainty is risk in the colloquial but not in economics. "Risk proper" can be measured, "uncertainty" cannot.

For example, it's uncertain when any of us will die. But mortality tables do a good job of calculating the risk of selling life insurance. While we cannot tell when we will die, we can deal with some of the consequences of this uncertainty by buying life insurance.

The insurance company has risk on its hands and manages it by having sufficient reserves something most individuals cannot do (which is why they buy the insurance in the first place).

A flash crash is unpredictable, hence uncertain, but you can protect your portfolio by not using stop-loss orders.

You might ask:

"How do I deal with this uncertainty?" and "How do I manage this risk?"

Denny Schlesinger

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454942 of 464871
Subject: Re: Defining risk Date: 7/15/2014 8:19 PM
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Denny:

You said: Reading the excerpt I posted might be enough to illuminate the risk issue.

Well, sir, I think you give me too much credit. The following excerpt of your excerpt makes the issue as clear as mud to this old redneck. And I can see no way to make his distinction between risk and uncertainty into a profitable insight for the way my mind works in analyzing company performance with a view to finding mispriced opportunities.....which is why I stopped reading the book in the first place. Perhaps when my head is in a different space, I'll "get it" easily and find an actionable piece of the puzzle from all the thought this man obviously put into the issues as he saw them. For now though, re-reading just the part you provided brought back enough to remind me why I stopped....the bookmark is still in place, but whenever I do get back into another attempt, I'll probably have to start at the beginning, given my memory.....


The essential fact is that "risk" means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. There are other ambiguities in the term "risk" as well, which will be pointed out; but this is the most important. It will appear that a measurable uncertainty, or "risk" proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term "uncertainty" to cases of the non-quantitive type. It is this "true" uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition.

Poz

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454956 of 464871
Subject: Re: Defining risk Date: 7/16/2014 9:22 AM
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And I can see no way to make his distinction between risk and uncertainty into a profitable insight for the way my mind works in analyzing company performance with a view to finding mispriced opportunities

If your objective is to "to find mispriced opportunities" then I grant the quote is of no direct help. I might suggest looking at BMW Method charts.

I came to Knight's text because I did not understand "volatility is risk" or even what exactly they meant by risk. In time I figured out these things:

MPT is for money managers, not individual investors. Most fund's priority is not performance but to accumulate assets. When a fund makes waves it churns customers. What MPT does for them is that for every winner they happen to have they also have a loser to make sure things are stable. Of course, they say it the other way around.

If a fund is leveraged then volatility can trigger margin calls which can quickly spiral out of control as in 2008 if the uncorrelated become correlated. In 2008 we effectively saw a chain reaction.

The above give rise to the concept of sturdy vs. efficient portfolios. Leverage makes a portfolio more efficient but more fragile hence volatility is uncertainty, not "risk proper" because you could not calculate the depth to which a market might fall.

But all the above is at portfolio level, not at stock picking level. MPT only looks at the asset's beta, not inside the asset.

Talking about options, Sheldon Natenberg says that volatility is your friend. The higher a stock's volatility the more expensive the option: sell expensive options, buy then back when they get cheap! Here we are not talking at portfolio level but at individual position level and it is here that I found an application for risk management.

Uncertainty is what keeps me away from margin and from buying calls and selling puts.

Denny Schlesinger

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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454964 of 464871
Subject: Re: Defining risk Date: 7/16/2014 10:41 AM
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Here's an example that distinguishes volatility from risk. Suppose TIAA-CREF offers you an investment that guarantees your principal and pays you a guaranteed 3% interest per year. Volatility here is either zero or meaningless, depending on your philosophical bent. But is there risk? There is a tiny, tiny probability that TIAA-CREF will default on this investment, and if it does you might lose your entire investment. So there some is risk here, albeit a small one. Although volatility is zero or meaningless here, the risk is not zero or meaningless in this situation.

It's important to point out that discussion of risk needs the context of a goal. If your goal is to earn 6% per year then this TIAA-CREFF investment is not risky -- you are 100% certain of not achieving your goal. Risk is a measure of the probability of a negative outcome in reaching a goal. To be a risk the percent probability must be greater than zero and less than 100.

Can you always measure risk -- such as the probability of default here? Well, in this case you have to estimate it, and it is subjective. Not surprisingly this is called a subjective probability. It's what Frank Knight calls "Uncertainty", to distinguish it from objective probabilities -- like those found in actuarial tables -- which he calls "Risk".

------------------------------

"Risk".....does it have a different definition for individual portfolios than it does for macroeconomic trends?

Perhaps an alternative way to say this is that macroeconomic trends are not pertinent for some investing strategies.

If so, should we state which definition or context we are using in any given thread?

I'm not sure this is practical. Author's forget. If they don't forget, what they write will have to have some qualifiers that will litter up their writing. Maybe it's best to leave it to the reader to pursue it if they think it's important. You are asking a good question, though, and it's good you brought it up.

Thanks,
Ears

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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 454970 of 464871
Subject: Re: Defining risk Date: 7/16/2014 11:53 AM
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But is there risk? There is a tiny, tiny probability that TIAA-CREF will default on this investment, and if it does you might lose your entire investment. So there some is risk here, albeit a small one.

There is also purchasing power risk if inflation (for the things you consume) is greater than 3%.

Potentially there is the potential for interest rate risk if the money received is not all for immediate use.

I can remember when annuity companies would guarantee 3%, I saw a recent contract where the guarantee rate was 1%.

Poz

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