Risk = ??

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?

If Risk = Standard Deviation, then

Poll ended at 05 Sep 2005 11:48

Risk is a probability of a loss
2
11%
Risk is a measure of uncertainty
12
63%
None of the above
5
26%
 
Total votes: 19

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deaddog
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Re: Risk = ??

Post by deaddog »

Modern Portfolio Theory is for Nitiots[b/]
A traders perspective on volatility and risk.

http://www.mercenarytrader.com/2012/12/ ... r-nitiots/

To begin, let us define our terms:
Modern Portfolio Theory (via investopedia): “A theory on how risk averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.”
Nit: In poker parlance, an über-conservative player who constantly folds and only enters pots with “premium” hands.
Nitiot: The player who is so fearful of risk, he (or she) will make terrible decisions to avoid it – laboring under the mistaken assumption that volatility and risk are the same thing
But getting back to Nitiots: On top of wrongly equating volatility with risk, these folks make an even nuttier mistake. The MPT Nitiot assumes skill has no bearing on outcome… perhaps the most fool-headed assumption academia has ever put forth!
According to these goofballs, factors like asset valuation, supply and demand, entry and exit prices, and basic risk management — all of which require skill to assess — don’t matter to the process at all. All that stuff is skipped in favor of “asset allocation,” where the chief decision is whether to (passively) accept a mix of 60 percent equities, 40 percent bonds or what have you.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
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ghariton
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Re: Risk = ??

Post by ghariton »

Larry Swedroe:
If you’re like most investors, you’re highly averse to the risk of large losses. That risk aversion leads investors to demand risk premiums for stocks that exhibit excess kurtosis (fat tails) and negative skewness—when the values that are to the left of, or less than, the mean are fewer but farther from the mean than values to the right of the mean. On the other hand, if you’re like most investors, you have a preference for stocks that exhibit excess kurtosis and positive skewness (like a lottery ticket). That preference leads to negative risk premiums for those stocks—resulting in below-market returns.

The bottom line is that if you have the stomach for the occasional large loss and the discipline to stay the course, you can earn above-market returns. Unfortunately for most investors, that’s easier said than done.
We already knew that. But it's comforting to hear the old truths repeated...

George
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Insomniac
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Re: Risk = ??

Post by Insomniac »

ghariton wrote:Larry Swedroe:


it's comforting to hear the old truths repeated...

George
The best part of that article:
Rebalancing requires that you buy what has done relatively poorly and sell what has done relatively well. That’s the exact opposite of what most investors do and is why most investors earn returns below that of the very funds in which they invest.
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deaddog
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Re: Risk = ??

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Larry Swedroe:

The bottom line is that if you have the stomach for the occasional large loss and the discipline to stay the course, you can earn above-market returns. Unfortunately for most investors, that’s easier said than done.
That makes no sense at all. Doesn’t the occasional large loss put you at a disadvantage? Why not take a small loss?

The statement refers to most investors. I would like to think that the participants in FWF are more sophisticated than most investors.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
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Re: Risk = ??

Post by LadyGeek »

I think you need to know when the small loss will occur. IOW, market timing.
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Re: Risk = ??

Post by parvus »

Ah, but we're still in a CAPM universe where high beta is theoretically rewarded. Unfortunately, the empirical evidence is lacking.
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Re: Risk = ??

Post by George$ »

I very much appreciate Bernstein and Zweig - as in -
‘Shallow Risk’ and ‘Deep Risk’ Are No Walk in the Woods - and a few words -
What Mr. Bernstein calls “shallow risk” is a temporary drop in an asset’s market price; decades ago, the great investment analyst Benjamin Graham referred to such an interim decline as “quotational loss"

Or - I always appreciate Warren Buffett - as in
Why stocks beat gold and bonds
The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability -- the reasoned probability -- of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.
I cannot help but think that the risk word is grossly overused in the investment literature, - in most cases meaningless bafflegab - and so cr** . :roll:
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ghariton
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Re: Risk = ??

Post by ghariton »

deaddog wrote:Larry Swedroe:

The bottom line is that if you have the stomach for the occasional large loss and the discipline to stay the course, you can earn above-market returns. Unfortunately for most investors, that’s easier said than done.
That makes no sense at all. Doesn’t the occasional large loss put you at a disadvantage? Why not take a small loss?
I think his point is that many people are very scared of large losses and so avoid situations in which these might occur, even though they might not be so bad from an expected return point of view. As a result, the price of such investments is driven down, and the expected returns driven up, until they become attractive all things considered.

Sort of like investing in equities in the spring of 2009. There was a risk of further very large losses as the international financial system was quite possibly going to implode. So lots of people fled the equity markets. Equity priced went down, and those who were willing to accept the risk of the large losses, and invested in equities, ended up doing very well.

Put it another way: If you want to eliminate the possibility of occasional large losses, you will wind up eliminating an awful lot of investment possibilities.

Swedroe was making the point in the context of "fat tails". Because many invest6ors are so allergic to large losses, fat-tailed investments are under-valued, and so are an opportunity for making money. Similarly, investments with positive skew are over-valued and so should be avoided (lottery tickets, IPOs, dividend yields of 30%).

George
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deaddog
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Re: Risk = ??

Post by deaddog »

Thanks George that explains it quite well.

I still argue that those who invested in equities in the spring of 2009 and ended up doing very well were probably only willing to take small losses. Had the market reversed they would have probably accepted their losses, got out and waited for the next opportunity.
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Re: Risk = ??

Post by Shakespeare »

I still argue that those who invested in equities in the spring of 2009 and ended up doing very well were probably only willing to take small losses.
My portfolio was down 20% at one point. The following YoY return was +30%, so I gained 5%, although I got in far too early - but had the gumption to stay the course.
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Re: Risk = ??

Post by adrian2 »

deaddog wrote:I still argue that those who invested in equities in the spring of 2009 and ended up doing very well were probably only willing to take small losses. Had the market reversed they would have probably accepted their losses, got out and waited for the next opportunity.
You can count me out of your supposition. I did invest more money in the spring of 2009 and my view on stop losses was exactly the same as today.
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Re: Risk = ??

Post by deaddog »

Shakespeare wrote: but had the gumption to stay the course.
Ever owned a stock that didn’t come back?

I know I certainly did. What I though were stocks that were fundamentally sound. Royal Trusco, Peoples Jewelers, Laidlaw, not to mention Northern Telecom that I bought as a stogy old telephone manufacturer for its dividend.

And in every case the pundits all maintained that we were holding good companies and that they would recover. Having the gumption to stay the course wasn’t the ideal strategy in those cases. In hind sight it was the worse thing we could have done
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Re: Risk = ??

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adrian2 wrote:
deaddog wrote:I still argue that those who invested in equities in the spring of 2009 and ended up doing very well were probably only willing to take small losses. Had the market reversed they would have probably accepted their losses, got out and waited for the next opportunity.
You can count me out of your supposition. I did invest more money in the spring of 2009 and my view on stop losses was exactly the same as today.
I've seen you take losses when we were playing over on the daytrading thread. :)
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Re: Risk = ??

Post by Shakespeare »

Ever owned a stock that didn’t come back?
Yes, a few.

But most of them did.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: Risk = ??

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deaddog wrote:I've seen you take losses when we were playing over on the daytrading thread. :)
Nobody's perfect! :)
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Re: Risk = ??

Post by deaddog »

adrian2 wrote: Nobody's perfect! :)
You are pretty close: You are a good trader and have to good sense to control your risk. :thumbsup:
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Re: Risk = ??

Post by deaddog »

Shakespeare wrote:Yes, a few.

But most of them did.
In hind site, even with the ones that came back, why would you let them go into a loss situation?
Especially stocks where you had a profit, that became a small loss, that became a big loss that became a total loss?

With the stocks that came back you had the opportunity to get out and buy back lower. Or even get out and buy back higher and have control over your risk.
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Re: Risk = ??

Post by Shakespeare »

I control my risk if I average down by limiting the total I will contribute. That limit varies, but is typically a few $K (single figures). My largest loss was on a private investment and was $15K; that was the only double-figure loss.
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Re: Risk = ??

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Shakespeare wrote:I control my risk if I average down by limiting the total I will contribute. That limit varies, but is typically a few $K (single figures). My largest loss was on a private investment and was $15K; that was the only double-figure loss.
So you control your risk by the amount you invest. By being widely diversified no one stock will make a big dint in your portfolio if it goes to zero.

I control my risk by limiting the amount I’m willing to lose on any one investment. The market cycles, sometimes I'm right and sometimes I'm wrong but as long as I keep my winning trades large and my losing trades small it seems to work out.
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Re: Risk = ??

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Shakespeare wrote:My largest loss was on a private investment and was $15K; that was the only double-figure loss.
Wow, pretty surprised shocked to hear that. I've lost several times that much in a single day, sometimes within an hour or even minutes.

Could explain the varying attitudes in the "would you risk a found million" thread ClosetIndexer posted a while back.



Also bought lots in late 2008 and was down 30% at the nadir. Never for a second considered selling, only excited at the buying opportunities. Got too greedy and missed buying some more by a hair on March 9th 2009, tought me an expensive lesson.

Everytime I hear folks mentionning stop losses, I feel like I'm watching Jerry Seinfeld wearing his new suede jacket that can't be out in the rain. No matter the topic at hand, it always feels like "dancing between the raindrops" to me.
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Re: Risk = ??

Post by Shakespeare »

gsp_ wrote:
Shakespeare wrote:My largest loss was on a private investment and was $15K; that was the only double-figure loss.
Wow, pretty surprised shocked to hear that. I've lost several times that much in a single day, sometimes within an hour or even minutes.
To clarify, that is the largest loss on a single stock.

The portfolio was down more than $15K when it was down 20%. :wink:
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Re: Risk = ??

Post by gsp_ »

Shakespeare wrote:To clarify, that is the largest loss on a single stock.

The portfolio was down more than $15K when it was down 20%. :wink:
Right but don't you hold ETFs for your intl exposure?

I was referring to stand alone investments too, not portfolio swings when mentioning hourly or daily swings of one or more Civics. I think it speaks to differences in risk tolerance or at least variance tolerance.
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Re: Risk = ??

Post by Shakespeare »

Right but don't you hold ETFs for your intl exposure?
Yes, but most of the paper losses were on the Canadian equity portfolio, which is not ETF'd.
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Re: Risk = ??

Post by SQRT »

I think I have a very high tolerance for risk. On several bad days in 2008-2009 our total portfolio (including employee options) was down over $1million. Didn't do anything but fret. Good thing too.
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Re: Risk = ??

Post by AltaRed »

SQRT wrote:I think I have a very high tolerance for risk. On several bad days in 2008-2009 our total portfolio (including employee options) was down over $1million. Didn't do anything but fret. Good thing too.
Those with multiple millions in retirement are not in the same league as the 'water treader' when it comes to risk tolerance. Half of $2million still buys a lot of marbles in retirement, more so than half of $250k. My risk tolerance at my level of net worth is considerably higher than it would be at a quarter of my current net worth.
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