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  • Writer's pictureIshfaaq Peerally

Risk Reward for Value Investors

What is risk?

An economist or statistician will look will talk about Standard Deviation and the Sharpe Ratio when talking about risk, in other words, risk is volatility. But if you ask Warren Buffett $BRK.B about risk, he's going to tell you that volatility is not equal to risk, risk is not knowing what you're doing.

The more you know about an investment, the less the risk will be. When you're making an investment, you need to look at different scenarios and the probabilities of each one of them happening. For example, if you're investing in a bank, you need to look at the scenario where interest rates go up and also where they go down. Then, you estimate the reward of each scenario. What you're looking for is Asymmetric Risk Reward.

It is possible to invest in a risky stock if the reward is big but you need to take a bigger margin of safety when doing so.

It is also important to properly diversify your portfolio. Investing in 500 companies in the S&P 500 $SPX500 is not diversification since many of these stocks are highly correlated with each other. One needs to invest in securities with low correlations with each other.

Also, make sure to know and to stay in your circle of competence.

Watch the full video on YouTube:

𝙃𝙚𝙧𝙚'𝙨 𝙢𝙮 𝙛𝙪𝙡𝙡 𝙖𝙣𝙖𝙡𝙮𝙨𝙞𝙨 𝙤𝙣 𝙧𝙞𝙨𝙠/𝙧𝙚𝙬𝙖𝙧𝙙:

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