Sometimes you can find in internet a lot of nice info. How to do this , how to do that…

So I decided to start more professional blogging and will write a lot on finance. Because I love finance and I should make a research in this field.

So each topic I will cover will help me to remember the material I am learning or will be learning.

So let’s go some basics.

Risks

What are risks?  Usual people will mostly say that it’s a probability to loose something. Financials would say that it’s not only about to loose something . Risks are basically probability of getting less than expected value or more than expected.

I will say it less complicated. Let’s assume that you have  a small very small peace of land. Let’s say  12cm x 20 cm. Enough to put just  potato. So if you  in early spring will buy a potato  and will put it in this ground and will water it, till  the end of the autumn   you should get the result. Potato seller , let’s say “Gold Potato’s and Batatas GmBH” salesman , give you a sertificate, where they proove that you will get in average 400-450g potato  from each one.(Farmville players  instead of 450g   read 450points )  )))

So  ExpectedValue (1potato) = 450g

So what is the risk here?  There are 100s of types and subtypes of the risks, but here the risk from this investment could be not only not getting even 1potatoe in the end, but also getting 500,600 or 700g. potatoe in the end.

As I found out in the Book of  Aswath Damodaran

INVESTMENT VALUATION:  SECOND EDITION,

“… Thus, risk includes not only the bad outcomes, i.e,
returns that are lower than expected, but also good outcomes, i.e., returns that are higher
than expected. In fact, we can refer to the former as downside risk and the latter is upside
risk; but we consider both when measuring risk. In fact, the spirit of our definition of risk
in finance is captured best by the Chinese symbols for risk, which are reproduced below:
The first symbol is the symbol for “danger”, while the second is the symbol for
“opportunity”, making risk a mix of danger and opportunity. It illustrates very clearly the
tradeoff that every investor and business has to make – between the higher rewards that
come with the opportunity and the higher risk that has to be borne as a consequence of
the danger.”

From the first point of view it’s somehow strange, why the over-performed result is also risk. It should be advantage many starters should say. Hm.. Let me explain why.   The simple explanaition of this could be following.

Imagine you have  a  Company A very conservative business,which  stocks  are sold very good, it’s stocks are growing or dropping in a very small altitude , lets say they are swimming in 20-26 amplitude ,and you have Company B, which management is very risk-loving persons team, and they do the business in a way that they or have very high profits or very high loses, so their stocks price changes in  very big amplitude. Lets say today they cost 12, tomorrow 50,  after tomorrow 5. Would you invest in Company B? YES? Then maybe you like ventures… We will come to Venture Investments bit later, but now, the basic Idea is that usually how big is the probability of  the over-performing amplitude, there is the same probability that  the investment will down-perform in the same amplitude.

When you have possibility to overearn 20% there is also maybe not the same but very close possibility that you will loose so much.

So be careful with something over-perfoming

Regards

Mr Gewa