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Risk and Investing

June 05, 2007

Jonathan D. Poland

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I think that risk is an important factor for all investors to think about before making a purchase and even a sale.

Even the best investment guru's make mistakes from time to time. If you look at the Gurufocus.com’s bargain stocks you'll notice that most of the money managers have at least one investment on the list. Even the greatest investor ever, Warren Buffett is down 21% and 22% on two companies (First Data & Lexmark) respectively.

This brings me to my thought on risk.

Risk is associated with two things: The company you're buying and the time you intend own the stock.

Buffett himself is notorious for "not knowing" what will happen next year; however, he does understand that as time goes by each business he chooses becomes less and less risky.

This is huge! Unfortunately, most investors, regardless of whether they think of themselves as long term or not often fail to hold the right investment long enough. They think of risk in terms of price drops in the short term. Now I'm not suggesting you haphazardly go through your stock screener and buy and hold just any ole' stock.

What I am suggesting is that once you get a really good business in your portfolio, you should practice the style of investing Charlie Munger likes... "Just sit on your ass!"

It's no secret that to be a good long term investor you have to have the right temperament and being able to hold investments long enough to see 1,000% and more is the key ingredient in my opinion! Just remember that risk systematically decreases the longer you hold a good company because it has time to reveal its true value, which is usually good!

I cannot stress this enough. When I first started issuing research reports for PigsGetRich, the first 4 companies I recommended (NXTL, WMB, CC, & ACF) each dropped between 20% and 40% within the first 1 to 4 months only to become some of the best winners in our portfolio with gains of 500%, 1,000%, 200%, and 1,000% respectively.

The point being, don’t panic if you buy the right company at the wrong time. Trust your reasoning and let the risk decrease the longer you hold the stock. If I would have panicked I would never have had such impressive gains.

___________________________________________

Jonathan D. Poland is the Founder, Editor and Chief of the PigsGetRich Investment Network. www.pigsgetrich.com

 

About the author:

Jonathan D. Poland
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.8/5 (5 votes)

Comments

Evan
Evan - 7 years ago
You forgot pricing risk; the risk that you paid too much for the company, leading to weak returns over time. Of course the effect of paying too much for a stock can diminish over time, but how long do you want to wait? I don't see a lot of the tech companies that crashed in 2000 making decent returns for investors for a long time.
armeetofo
Armeetofo - 7 years ago
all I need to do is to find the great company at the good or cheap price, if I pay too much for the great company. my return will be poor for sure, no matter it is high tech or the other company, i am very patient to wait 5, 8, 10 even 15 years, like WMT when it hit the high price at $ 70.25 in 1999, almost 8 years pass, it still at $50,s if I bought it at the peak, you know my return is, it is the RISk
zoomxc01
Zoomxc01 - 7 years ago
Evan - thats because most of the "tech companies" didn't make money to begin with and were NOT good companies to invest in. You are confusing investing with speculating. What Jonathan is stating is that a sound analysis based upon the principle of investing with a margin of safety should yield satisfactory investment results over the long-term irrespective of short term price fluctuations (which should be of no consequence). Time will change the fact that you invested in a terrible company.
billytickets
Billytickets - 7 years ago
even the fact you are paying The "right price" is assumed by the author.My book Consume Consume and Consume More has a formula to calculate intrinsic value and has picked MANY stocks that Buffett has also bought. This article is GREAT
pigsgetrich
Pigsgetrich - 7 years ago
This is true, you can buy a great business at the wrong time and be doomed to mediocre returns. However, that goes back to "the company your buying." Typically great businesses are usually priced at fair values - look at Wells Fargo, USB, and the railroads Buffett himself is buying. Not to mention it has been said that "buying a great business at a fair price is better than buying a fair business at a great price!"

Just a thought :)

JP @ PigsGetRich
buffetteer17
Buffetteer17 premium member - 7 years ago
Let's quantify: Chances of being ahead on an investment that yields 10% with a 20% standard deviation over different time frames:

time probability

1 day 51.2%

1 week 53.2%

1 month 56.4%

1 year 72.6%

10 years 99.9%

Shows the importance of a long time frame. Source Mauboussin, "More Than You Know."
billytickets
Billytickets - 7 years ago
Home Depot is a perfect example of a stock whose EPS grows every year but it sold for in the 60s in 2000.which was higher than 50 times earnings if im not mistaken. Buying the RIGHT company at the RIGHT time is KEY
Evan
Evan - 7 years ago
Zoomxc01,

"most of the "tech companies" didn't make money to begin with"

-Yes most, not all.

-Alternatively, you could have invested in Home Depot (a great company) in 1999 at near $70/shr and still be waiting to break even.

-And yes I know the difference between investing and speculating. The only person who is confused is you; Please provide support for, "time will change the fact that you invested in a terrible company." It seems to me that if you invested in a terrible company, time will not make the company good, as your statement actually suggests.

-No where in his article did he mention a "margin of safety". I am not sure where you see him saying that.
Evan
Evan - 7 years ago
And no, time is not a margin of safety. A margin of safety has to do only with the price you pay for the value that you get.

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