Saturday, February 18, 2006
A four letter word: Risk.
Risk is not volatility (beta) and it's not a lot of things that the academics ponder. In my mind there's two kinds of financial risk: the risk of permanent loss of capital, and the risk of returns insufficient to meet future expenses.
They are very different, and usually arise from two different places. Permanent loss of capital usually arises from chasing too high a return under too uncertain circumstances.
Insufficient return risk usually arises from a belief that complete safety of capital exists, and that capital can be completely guarded. This mindset usually results in achieving far too low a return, given the circumstances.
The Confused Capitalist