Hey folks! investing is like a marathon, not a sprint. And just like any marathon, there are hurdles and stamina would be tested to Survivor with Growth, as a yard-stick.
Here's how to glide over them with the grace of an Olympic hurdler. I mean not necessarily holding a piece of business for years. However, surviving and growing on our own terms is a ‘lifestyle’.
Today let’s discuss risk in general. It starts with understanding and acknowledging the risk. The following are broad risks associated with equity investment -
1. Business Risks: Every business has inherent risk related to its industry segment, and own business model. Understanding the nature of the business and risk associate it the key.
2. People Risk: It is mainly Promoter, Management and Employee competency and trustworthiness towards Shareholders, by and large towards Society.
3. Competition: Overall industry scenarios and customer behavior are key to tackle competition. It is tussle of commodity Vs brand or service.
4. Market Risk: Even long term investments can't totally escape broader market forces. For traders’ market fluctuations is Surf to ride on.
5. Margin of Safety: How much worth a business worth in value and what price you are willing to pay? While for trader it is the probability of trend followed, Vs occurring of black-swan event during trade.
6. Inflation Risk: Over time, inflation can eat into your returns. Yup, the silent killer.
7. Interest Rate Risk: When rates rise, stocks typically dip, even if it's just temporary. Rate sensitive businesses are get affected quickly, like – Finance, Real-estate, capital intensive (Eg. Infra), and other. Another side of the coin is ‘Liquidity Supply’.
The interest rate influence the liquidity and market prices of stocks.
8. Currency Risk: The ups and downs of the local curency can mess with your investments, specifically which are related to Exports & Imports.
9. Regulatory Risks: The regulatory changes could influence the business. The businesses like finance, pharmaceutical. The environmental, Social and Governance.
10. Economic Cycles: Recessions can be brutal, and booms can be deceiving. The periodic economic cycles bloom and bust few business. It depend on the nature of the business, capital structure and overall market pull.
Second step is to manage the risk. As Playbook following are few aspects to follow -
1. Framework: As risk is inherent, everyone including corporates need to have a framework. And discipline to adhere to them. The framework varies based on risk appetite, timelines, and fallback options, if any.
Monitoring is key in framework and risk management. As we are dealing with real life and situations and people (Customers, Management, and our self) keep changing.
2. Diversification: Think of it as the stock market's version of "Don't put all your eggs in one basket." Diversification is not mandatory for the namesake. However, to have flexibility to the framework, and have a sense of the probability of occurring an event.
3. Inflation-Adjusted Goals: Aim for returns that outpace inflation. Your future self will thank you.
In conclusion, risk management is another side of the return for an investment coin. An investor recognizes, and control that suits to her or him.
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