THE ONLY THREE WAYS TO CONTROL INVESTMENT RISK
I have done a great deal of research and have concluded there are only three ways one can control risk while still retaining the potential for gain. The three considerations, or factors, that influence our exposure to risk are:
- The quality of the investment one makes.
- When you decide to purchase the investment.
- How much of your bankroll goes into that investment.
Obviously, the lower quality the investment is, the greater your risk will become. Invest with low-quality people and expect low-quality results. Invest in junk and you’re going to get junk back. This chapter will be focused on determining what is and what is not “junk” in the stock market.
The time when you decide to make a purchase is just as important as the quality. If you bought Microsoft at the right time you would have made a fortune. So timing makes a difference. Never let anyone tell you otherwise.
The problem with finding quality and selecting the right time is that doing so does have its subtle nuances. We can codify this to an extent, even developing rules and strategies, yet there is part science and part art to this. In other words, judgment will be involved, but isn’t judgment involved every day in our lives and in everything that we do? Of course it is, but given a sound foundation, your judgment will serve you better than a person without a good understanding of the subject matter at hand.
Finally, the amount of money you plunk down into your investment determines your exposure to potential risk. Had you bought one share of Microsoft, even at the high, you may well have been able to endure the pain of its decline. But had you put in your entire life savings it would be a totally different story.
All this is very good news: An investor can control risk. Speculators and plungers seemingly seek to expand risk in hopes of higher returns, yet the risk ultimately pulls down even their most spectacular gains.
