Risk and Uncertainty

Risk and Uncertainty

Take the information risk, so long as the price risk is relatively low.

Justin Mamis

 

You often hear one of guests on market call say something to the effect of, ‘oh I wouldn’t go near that, it’s too risky’ or 'we'll wait until the dust settles and the uncertainties are resolved.'  It’s often just a knee jerk reaction, like a cliché, something that comes out of people’s mouths before it passes through their brains. Or maybe it’s got more to do with staying near the status quo of being an index hugger who can feel relatively safe in the conformity of the consensus. Whenever someone looks on just one side of an argument, you should question it. Remember the analogy of Wager Value as it related to handicapping racehorses, ‘betting on the horse who has the best chance of winning relative to his odds’. If the story around a stock is judged too risky it can get to the point where the uncertainty will drive all the sellers out of the stock to the extent there is no one left to sell. Its price ends up plummeting to a point where it can become an attractive investment relative to the underlying value of the company. Always remember to relate the price of a stock to the value of the underlying asset. It comes back to psychology and emotion again. People get scared and run away without thinking things through. If uncertainty brings aversion it can also create opportunity. Remember at emotional extremes in the market try to be contrary. Step back and coolly access the landscape. Ask yourself if you can take advantage of the current situation. You have to be dispassionate and keep your emotions out of the thinking process. 

I first came across the term, 'information risk' when I read 'The Nature of Risk" by Justin Mamis. Information risk means the information may be all bad or it may be almost non existent. Conversely the 'price risk' at this time will be very low. If its so low relative to the value of the companies assets it could very well be an attractive investment. Since I'm a growth investor with a value bent, the value of a companies assets will be the future value of the companies cash flows discounted back to the present time. A old fashioned value investor may be attracted to a valuable hidden asset on the companies balance sheet. No matter how you cut it, it all comes back to paying less for something than it is worth. 

I'll give the last word to the most quotable man in investing, Howard Marks,

'When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where its not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.'  

Just like a symphony.