Risk explained by Warren Buffet Quotes

As we know Barren Buffet is one of the greatest value investors following Benjamin Graham's footstep. He had own quotes related to risk which are explained as follows:

 “ Only when the tide goes out do you discover who’s been swimming naked”

It is related with company having lots of debts. When company has lots of debt (leverage) then in the long run the company may not be productive to service the debt. However, some manageable amount of debt can be productive. It also depends on type of industry. However, when the company has lots of debt which refer to “who has been swimming naked” when the market crash (when the tide goes out) will known who will survive and who will not (discover).

 “ Price is what you pay value is what you get” 

When you are buying a stock you are buying piece of business but you need to ask at what price? Are you overpaying for the sock?

Although investors might have the opportunity to purchase a really great business, the price at which they purchase the asset can actually result in a poor investment. We might pay excess for the value what we get. Hence, the price is what we pay and value is what we get. This idea is at the heart of a value based investing approach and in the long run value will prevail.

In his 2010 shareholder letter, Warren Buffett used Berkshire Hathaway as a case study for this asset price/value reality.“For the forty years, our compounded annual gain in pre-tax, non-insurance earnings per share is 21.0%,” he wrote. “During the same period, Berkshire’s stock price increased at a rate of 22.1% annually. Over time, you can expect our stock price to move in rough tandem with Berkshire’s investments and earnings.” And then he stated in such a colorful way that only he can do: “Market price and intrinsic value often follow very different paths — sometimes for extended periods — but eventually they meet.”

“Risk comes from not knowing what you are doing”

We are taught in finance about risk and risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. However, for Warren Buffet risk is not having Knowledge. One of the hardest things for an investor to do is to admit that they don't know all the facts. Although this may prove challenging, the faster an investor can identify they lack of knowledge or ability to properly account for all the variables, the less risk they'll assume in any investment.

Hence, rather than diversifying stock it would be better to invest  in those stocks which you have circle of competence as Warren Buffet says, ‘‘Invest within your circle of competence. It’s not how big the circle is that counts, it’s how well you define the parameters.’’

Akhilesh Bikram Sthapit

Financial Analyst

Author can be reached at bik.akhilesh@gmail.com

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