Real Risk

Many view risk as standard deviation. That makes sense if you sell every time your investments fall in value. That is not akin to reality for most, I hope. It is more of unrealized risk. The moment you sell the security, it becomes a real risk, and so it becomes a real loss of capital. As Benjamin Graham writes, “…the bona fide investor does not lose money merely because the market price of his holdings declines; hence the fact that a decline may occur does not mean that he is running a true risk of loss.”

He proceeds, “This confusion may be avoided if we apply the concept of risk solely to a loss of value which either is realized through actual sale, or is caused by a significant deterioration in the company’s position- or, more frequently perhaps, is the result of the payment of an excessive price in relation to the intrinsic worth of the security.”

This brings up another form of risk- the price at which you pay. When you buy a stock or bond dear, or without a margin of safety, you lose any advantage you could have had. The likelihood of an unrealized gain is high and a realization of your mistake and a loss of principal becomes high. It is one thing to buy just to see fundamentals crumble, but that may be out of your control. In any case, I believe it is best to look at risk as if is in your mind until it becomes realized.


Source: Intelligent Investor