How we look at Risk

Photo by Gladson Xavier on Pexels.com

Risk has a definition we find peculiarly interesting.
In the modern theory of finance Risk is too closely connected with the volatility of asset pricing and the probability of not being able to liquidate the security at a price the buyer feels is fair. Risk is usually quantified in terms of “Standard Deviation” of its historical stock prices, higher standard deviation implying higher risk and vice versa.

Similarly it is said that an investor with a longer time horizon can withstand higher risk than one who has a shorter time horizon. However we believe someone starting off with his career can, rather should take much lesser risk as opposed to someone who has just retired.

Au contraire, we as investors look at “Risk” as the probability of a drawdown post making such investment, if such drawdown would be permanent in nature and if not how much time it could for the investment to revive in term of its value.

Optimal risk management, can not be done unless risk is completely understood by the respective investor and we strongly believe optimal risk management plays a very very vital role in being a successful investor.


We believe calling a stock risky because it has become more volatile is actually letting go of a very lucrative opportunity. Most analysts shy away from stocks that have come drastically crashing down because it seems way more risky, however in truth the extreme panic actually discounts all its fundamental strength, well at-least whatever off it that is left. But then again a lot more diligence is required here.

To buy a high quality stock with the hope the underlying company maintains its growth trajectory is actually more risky, in comparison. Such a company consistently trades at a premium of earnings awarded to it purely on the higher than average growth rates, but can these rates persist into perpetuity?
This high quality stock does in fact also trades with much lesser volatility, reducing SD and beta- justifying beta anomaly.
Beta Anomaly, is a concept that implies low beta stock that theoretically are less volatile have outperformed those stocks that have a higher volatility. But using our outlook it does set in line with “higher risk = higher reward”


We strongly believe investors & traders should not have the same definitions of risk, in-fact we believe the definitions of risk to each of them are exactly opposite to them.
While a trader should chase momentum an investor should shy away from it, since rarely can one find valuation and momentum in the same stocks-
However, such opportunities were available aplenty from March’2020 through October’2020.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Create your website with WordPress.com
Get started
%d bloggers like this: