Like opportunities to make money, the degree of risk present in a market derives from the behavior of the participants, not from securities, strategies, and institutions. Regardless of what's designed into market structures, risk will be low only if investors behave prudently.
When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it's not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.
When everyone believes something embodies no risk, they usually bid it up to the point where it's enormously risky.
Whatever few awards are presented for risk control, they're never given it out in good times. The reason is that risk is covert, invisible. Risk - the possibility of loss - is not observable. What is observable is loss, and loss generally happens only when risk collides with negative events.
The worst loans are made at the best of times. This leads to capital destruction - that is, to investment of capital in projects where the cost of capital exceeds the return on capital.
When buying something has become comfortable again, its price will no longer be so low that it's a great bargain. Thus, a hugely profitable investment that doesn't begin with discomfort is usually an oxymoron.
You tend to get better buys if you select from the list of things sellers are motivated to sell rather than start with a fixed notion as to what you want to own. An opportunist buys things because they're offered at bargain prices. There's nothing special about buying when prices aren't low.
Mujo means cycles will rise and fall, things will come and go, and our environment will change in ways beyond our control. Thus we must recognize, accept, cope and respond. Isn't that the essence of investing? (Potential fund name)
The critical observation is that the [investor] pursues high returns, even in a low-return environment, and bears the consequences - increased risk - although often unknowingly.
Investors are right (and wrong) all the time for the "wrong reason." Someone buys a stock because he or she expects a certain development; it doesn't occur; the market takes the stock up anyway; the investor looks good
I don't think many money manager's careers end because they fail to hit home runs. Rather, they end up out of the game because they strike out too often - not because they don't have enough winners, but because they have too many losers. And yet, lots of managers keep swinging for the fences.
Investing defensively can cause you to miss out on things that are hot and get hotter, and it can leave you with your bat on your shoulder in trip after trip to the plate. You may hit fewer home runs than another investor...but you're also likely to have fewer strikeouts and fewer inning-ending double plays.
In heady times, capital is devoted to innovative investments, many of which fail the test of time. Bullish investors focus on what might work, not what might go wrong.
When investor psychology is at equilibrium and fear and greed are in balance, asset prices are likely to be fair relative to value. In that case there may be no compelling action, and its important to know that, too. When there's nothing particularly clever to do, the potential pitfall lies in insisting on being clever.
In good years in the market, it's good enough to be average. Everyone makes money in the good years, and I have yet to hear anyone explain convincingly why it's important to beat the market when the market does well. No, in the good years average is good enough.
The Most Important Thing
No comments:
Post a Comment