28 August 2011

Risk & Return, key element in Investment?

Many people were asking me on how to differentiate investment with speculation. In my opinion, Investment is something that already take into account potential risk and return involved where speculation always look at the potential return without the risk involved.

In order to speed up the process of investment, one thing we should look at is to find out our risk & return characteristic. For example, you would think that there is one good investment opportunity for you to get a good return, do not forget about the risk involved. For example, if you like a good return such as achieving 100% return in a month, then you should also be willing to take the risk of losing 50% of your invested capital in a month.

In contrast, Benjamin and his pupils do not agree with the theory above, as they see short term volatility as the lowest priority that we should think of. Instead, we should look at the long term perspective:

  • Business Risk - Whether the company is in a good industry? Which business cycle is this industry now? 
  • Financial Risk - What is the debt level of this company now? Can company has the debt repaying power in short term and long term? 
We could only guess the possible earning growth in next 2-3 years. If only we are sure for earning growth for the next 10 years, then we should be able to sleep well every night. 

Nevertheless, you could think of a question that I always ask:

"Why someone earned money but someone loose money even if they invested in the same product/stock?"

Please let us know your view on your Investment Philosophy.

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