Recently I saw an article describing how to distinguish between legitimate investment companies and fraudulent companies: the boss is confused, his speech is ambiguous, his expression is confused, when he talks about investing, he always talks about risk, his expression is dull, his spirit is weak, at first glance he is breathless from the stress of his life, he does not dare to guarantee you a return. The investment manager who is generally the best in the industry. Although I have to wear a suit and slippers every day because of my work relationship, but I still have to pay tribute to such a person, especially in the first paragraph, when I first talk about investing, I always talk about risk, to judge the trustworthiness of the fund manager without talking about risk. In general, there are two things about clients that I always report with the most affectionate gaze: one is the investment goal and the second is risk tolerance.
Let's make a word source argument, whether in Chinese risk or in English risk, is a foreign language, and the following is its long journey: Ancient Greek ριζα
The understanding of risk in finance is roughly the same as that of traditional hedge fund management and hedge fund management. If you are a hedge fund student in school and you have studied both Buffett's investment theory and hedge fund risk management at the same time (many universities offer similar value investing electives), you are likely to have schizophrenia.
The conventional view, or what we might call the Buffett view, is that risk is the probability of loss or injury. But modern finance has to ask, "Am I good or bad at modeling, you and la la land are just as much fantasy as usual?"
So the contemporary view, or what we might call the academic view, is that starting from empiricism, we find a rough pattern from a large amount of historical data: high-risk assets (still understood here as having a high probability of being lost) generally have greater price movements.
So they give risk an agent, called volatility, where volatility is high and volatility is low; and volatility itself has an agent, called the standard deviation. Then they divide risk into systematic risk and non-systematic risk, and according to modern association management, non-systematic risk (also called company-specific risk, such as the fluctuation in the price of a stock caused by the swine flu) can be completely absorbed by adequate diversification, so in their eyes it is only systemic risk, not non-systemic risk.
So from the perspective of modern syndicate management, the risk becomes a systemic risk that cannot be diversified. They call it β (beta), which is read as beta in an open tank. Beta measures the sensitivity of the expected return of an asset to the expected return of the market as a whole.
Buffett naturally rejects the academic view of risk. First of all, the standard deviation is definitely unreliable. For example, there are two stocks A and B, where the price of A shares on the last trading day of the last six years is 1, 2, 3, 4, 5, 6, and B shares are 2, 1, 2, 1, 2, 2, 1, 2, 1.
A shares have risen 500% in six years and B shares have been steadily cut in six years, resulting in A being more risky than B.
I'm not going to talk about the beta.
Bethany's enemies are too many, especially those with the nickname, and they're screaming and shouting at her.
We, who are devoted fans of Graham, never talk about beta, we never talk about CAPM or the price differential between securities. We only care about two things: price and value... (Let's take an example) if a stock falls from $80 million to $40 million, its beta will be higher. If you think beta measures risk, then while the stock is cheaper, it looks more risky.
Buffett has a saying: "Risk comes from ignorance". It means that knowing is not risky, and the price of the stock fluctuates and fluctuates and you are not at risk.
According to Seth Klarman, Beta simply measures risk from market prices, and basically ignores the fundamentals of the investment target. It's also hair-raising that the price level is also completely ignored. According to this perception, investing in $50 worth of IBM stock is as risky as investing in IBM at $100.
The hedge fund community and many professional investors have come up with a brilliant idea to define risk with a Greek letter beta. They argue that stocks with higher historical price volatility are more risky. But real investors would certainly consider this to be a scam. A highly volatile stock can also be extremely undervalued, thus becoming a very low-risk investment target.
Beta also assumes by default that the upside potential of an investment is roughly equal to the downside risk, which is contrary to the reality of the world as we know it. Historical fluctuations cannot predict the future performance (or even future fluctuations) of an investment, so using beta to measure risk is useless.
In 1992, Nobel Prize winner Professor Eugene Fama and his colleague Ken French published a study showing that the historical beta of a stock cannot predict future betas. Other studies showed that betas tend to have mean reversion, meaning that all betas of all stocks will return to the mean value of 1 tonne every time they are pulled back to a wild old time.
So we struggle with historical data to get back to a beta, like a treasure, but in practice it often feels strange. For example, a company might measure a beta equal to 1.4, but the market suddenly crashes, like the October 1987 Black Monday crash of 20%, so the company may have fallen 12%; and then you crash, and the beta of the stock is 1.4 or 0.6?
From a beta perspective, your forecast is always at most as good as your historical data.
Beta was a pain in my heart. Because I was born in a financial school, I learned beta, alpha, CAPM, and APT in the Ivory Tower, which were strong in theory but useless in practice; and later, the CFA curriculum was basically about managing the core of beta. So I had to learn beta.
However, I was unfortunate enough to learn about Beta's face in the real world early on because I was brainwashed in my childhood by the ideology of price-fixing. So it can be said that I finished my studies of the knowledge of these academies with tears in my eyes, but at the same time I had to fill my heart with doubts.
In the real world of finance, we still have to figure out some practicality. A more common one is JPMorgan's VaR model, which can be translated as the Value-at-Risk-Risk model, which measures the maximum possible loss of a financial product or combination.
VaR is a measure of the potential loss over a period of time and the likelihood of that loss occurring. For example, 10% monthly VaR = 5%, which is read as the market value of the asset (combination) will decline by at least 5% over that period of time. I do not intend to go into detail about this model, its core idea, or to trace it back to the intention of the risk: the likelihood of producing the largest loss.
Of course, there are also those who think that understanding the possibility of loss of life is not enough, such as Professor Aswath Damodaran, who knows the best definition of risk?
The old adage goes: the greater the risk, the greater the reward.
This phrase is not compatible with the view of the academicians, so it is actually a prerequisite for many financial theories. Risk = fluctuation, they believe that the greater the fluctuation, the greater the expected return, otherwise this combination is not on the efficient frontier, and not the oddity on the efficiency frontier we do not consider.
This idea has a profound impact. For example, we examined the performance of fund managers. In 2016, Wang's fund manager's remuneration rate was 10%, Xu's fund manager's remuneration rate was 20%, which of the two was stronger?
So here's the solution. According to the modern combination theory, risk = fluctuation, we can define the molecule as the combination yield, the risk-free yield, the denominator is the average standard deviation of the combination, the next one is the Sharpe Ratio, which measures the level of return after adjusting for risk.
This is a version of the theoretical abstraction of Sharpe Ratio. The Sharpe Ratio is also a close relative of the Sharpe Ratio, which measures the ability of a fund manager to obtain proactive returns. However, risk (fluctuations) and expected returns are comparable to the assumptions made by the master professors.
Buffett responded to this by saying: "Hmm.
He said (I'm still honest here, quote directly from the speech of the super investors of the Gujarat) "You don't deny that the risks and rewards in our lives are positively correlated. For example, you give me a revolver, take a bullet, turn it around, and say to me: shoot your brain pocket and I'll give you a million. I'll politely decline, probably because I feel a million is not enough. Then you might say: then I give you five million, but I'll shoot two guns.
But value investing is the exact opposite. If you spend one dollar to buy a six-dollar asset, it's more risky than if you spend six-dollar to buy a one-dollar asset; but the latter has a higher expected return. In a value investor combination, the higher the potential for expected returns, the lower the risk.
Buffett is also confused as to why we should quantify risk. Why should we not quantify risk? In value investing, the risk is not 0 but 1. Where there is risk, we don't go until we're done.
Many of the views of modern combinatorial theory generally assume that all people are risk-averse. Of course, this assumption is not about risk aversion, but rather that if you want me to take a risk, you have to take an equal share of the expected return, which I would not want to take. But this assumption is not our real world.
I'm not sure that's the case, but it's not necessarily the case.
(1) I'll give you 100,000 yuan right now.
(2) If I don't give you the money now, a year later I'll throw a coin, and the person will give you 200,000 yuan, and the number you give me is 10 yuan.
I don't think everyone would go for option 1, although the person who chooses option 2 is actually not very rational: 1) the expectations of the two options are not equal, the expectation of directly taking 100,000 yuan is 100,000; the expectation of throwing a coin and taking 20,000 yuan is (20,000 X 50% + (-10) X 50% = 90,000 9995 yuan, a rational person should not choose 90,000 9995 yuan and give up 100,000 yuan; 2) money has time value, even if the expectation is reasonable, you should also choose the money at hand, and should not consider a year later.
So why is it that some people are irrational at this point in time to choose 2?
Because risk is effective, this magnificent adventure will leave you with a whole year of embarrassment, excitement and anticipation (for some people it may be 200,000 without any affection, then add up to 20 million). So what is utility?
There are many casinos all over the United States, which I also occasionally visit. But I have a rule of my own, which is to spend only 100, lose and never forget. I generally only play Craps (a game of dice, in fact I like to play de dumo but 100 blocks is not at all the table), because this bet in terms of odds the house advantage is relatively small, as long as the strategy is very radical, 100 blocks can actually be played for a long time.
But anyway, I can reasonably recognize that unless I have bad luck on the day, otherwise, as long as I play for a long time, I am sure to lose money.
Because the pursuit of risk is exciting in itself. So I spent a hundred bucks, which is actually like spending a hundred tickets to Disney, to buy a refreshment and utility. If you theoretically assume that all people do not take risks as long as there is no obvious return (expected return), then there is no way to explain driving on the highway, unless the driver is not a person.
Our Creator's handiwork is a masterpiece, so there are a thousand wonders in the world. If you say that you are not a rational person if you do not hate risk, then I can only say that you are too self-centered, too self-confident.
Since the universe makes us so different, the first lesson we should learn when investing is to have a clear understanding of our risk preferences.
Risk preference can be divided into two halves, one is the willingness to take risks, the other is the ability to take risks. Will and ability are generally no big problem as long as they are in harmony: for example, if you have a large family fortune, you can of course from time to time pick up a futures option to craftsmanship; or even if you are a family man, but you do not waste your time, that is at most a big festival shrinkage, you will not be destroyed by any disaster.
Wang Xiaobo has said that all human suffering is caused by a lack of desire and ability, so specific to the risk preference of investing, the more difficult to do is the willingness and ability disagreement. For example, one brother is the richest of any county municipality, and the money is invested in U.S. Treasury bonds, which is a little too weak. Or another brother has a blue sky spirit and steel will, but comes out of the second half of the year to pay the university directly to kill the Hong Kong Stock Company.
A man like that needs some proper risk education, the former to make him a little man, the latter to make him a little like a man.
So the question is, do you know your risk preferences? A small test below may help you understand this better, if you're interested, do it and don't pay.
Note: This survey questionnaire was produced by two professors at Virginia Tech and the University of Georgia, sourced from:http://njaes.rutgers.edu:8080/money/riskquiz/All the units are in US dollars and I scale them on a scale of 1 to 5.
Here are the rules for scoring:
Add up your score.
18 points or less: low risk tolerance, conservative investor
19 to 22 points: below average risk preference
Scores 23 to 29: Risk preferences in the middle
29 to 32 points: above-average risk preference
33 or higher: High risk tolerance, radical investor
If there are any shortcomings in this article, please correct it. I am welcome to re-post, but please note snowball, sign chenda, thank you.
Translated from Snowball