When and what is risk?

by | Mar 8, 2002 | Archives

A request from a reader outlines the hazards of risk and how to profit from them.

This letter was recently received from a reader,

“Dear Gary,

LongLeaf Partners is investing heavily into Japan these days and I notice two of the largest holdings are Nippon Fire & Marine and Nissan Fire & Marine Insurance. Francois Sicart of Tocqueville Asset Management reports that there are Japanese companies whose stocks are selling for less than the amount of cash on hand. Of Course if the cash on hand is devalued, that might not matter.

Do you have an article in your archives where you've discussed this issue? Thanks for the info on Denmark. Is Denmark in good shape, how is there currency?”

My reply may help you understand when to take risk and not.

First, many economic studies show that some risk added to a conservative portfolio actually reduces overall risk. This is because nature gives us this wonderful element of surprise. Seemingly conservative investments may actually be high risk. Had I suggested that Japanese government bonds, Enron or Xerox shares were high risk, a few years ago, I would have been laughed at by most of the establishment. We just never really know. So when a seemingly high risk investment offers a risk premium, the reverse works. There is a chance that things will come good and if so, there is opportunity for a huge profit.

Hence, a bit of Argentina may make sense. A bit of Egypt and maybe some Korea. A recent message at this site outlining Michael Keppler's top value markets shows that emerging markets are 30% undervalued. This suggest that investing in emerging markets makes sense now. This is also why I am investing in Ecuador.

Japan by the way is still not rated by Keppler as even a top value major market and even the top value major markets are only undervalued half that of emerging markets. Their may be some Japanese shares that offer good value, but Keppler's statistics suggest that other markets on average offer better bargains.

Whichever risk you choose, certain rules should apply. Warren Buffet, one of the world's great investors, offered these core principles.

  • Do what you like.
  • Money isn't everything.
  • Work only with people you like.
  • Buy businesses, not stocks.
  • Invest only in what you understand.
  • Don't over diversify.
  • Keep looking for new opportunities.
  • Buy businesses you plan to keep for life.
  • >Look for businesses that are available at a good price.

One of my earlier messages entitled “the Ultimate Key to Success” covers these ideas in more detail. You can read this article at https://garyascott.com/inspired/36/

Investing is like looking into the future. We can only guess, do our sums and hope. We can never see the future for sure. This is why you should use the three step business evolutionary cycle when you invest. Here are the three steps.

#1: You have an idea.
If that idea enthuses you, use that energy to take the next step.

#2: Get an education.
Find out what you can about the idea. Then use this knowledge to take the next step.

#3: Take a first small action
!This action leads to either profit or loss. You will also get more ideas which leads to the next step.

#1: You have an idea.

Until next message, good global investing!

Good investing.