One-way ticket34
Riskier shares should offer more return
‘What about our luxury holiday company?’
‘It’s medium to high risk,’ she said. ‘Above the stable equity
but below the Russian oil company. I’d take a punt at 15 per
cent return every year. I reckon that will cover me for the extra
uctuations in the share price.’
Return
15%
Low Medium
Risk
High
Riskier share
Stable share
Government
bond
‘Your last choice is the Russian oil company. We all know that’s
super-risky, but if the return is high enough you’ll take a chance
and invest.’
‘It’s very risky,’ she said. ‘I’d need to get 25 per cent return every
year.’
Risk and return
I drew a line which linked up the four investments. ‘What do
you see?’
‘Risk and return are linked.’
35The leap of faith
‘And that’s the most important lesson you’ll ever learn about
investment decision-making. If you buy something that’s risky,
you should be compensated by the possibility of higher rewards.
But remember, it’s only the possibility.’
‘What does this mean in real life?’
‘If you want to make loads of money, you’ve got to be prepared to
risk losing your investment. But if safety is your main objective,
you’ll choose low-risk investments and have to accept a low
return.’
‘I see. Nothing ventured, nothing gained.’
‘That’s right. Risk and return are correlated. If you can’t afford to
lose your capital, you’ll choose the government bond and avoid
the riskier end of the market. If you can live with the idea of
losing your money, then you go in search of higher gains.’
Return
25%
Low Medium
Risk
High
Volatile investment
Riskier share
Stable share
Government
bond
Conrad opened an eye. ‘I would never invest in Russia. I’m too
cautious. I’d hate to lose all my money in some mad speculation.
I couldn’t sleep at night.’
‘But what about if the share offered 30 per cent?’
‘I still wouldn’t be interested. I want a steady income and I want
my money to be safe. I would rather miss out on a capital gain if
it exposed me to the risk of a capital loss.’
One-way ticket36
‘Forty per cent?’
‘You’re getting warmer.’
‘Fifty per cent return per annum? Surely it would be worth the
risk?’
Conrad shook his head. ‘OK,’ he said, but he didn’t sound too
convinced.
Day 1, 5.30pm The French countryside
The sun was setting. Anisa yawned and there was a snarl on
Conrad’s face. ‘I think you made a classic mistake when you were
talking about risk earlier.’
‘What’s that?’ I asked.
‘You’ve tried to quantify risk. But risk isn’t an exact science. Risk
in nance means something you didn’t expect. And that must
include risks you’ve never even thought of, and have completely
ignored because you thought there was no chance of them
happening. Look at all the big brains there are in the investment
world, and look at all the mistakes they’ve made.’
Conrad took a sip of coffee before he continued. ‘Consider
the last nancial crisis. According to the experts it should
never have happened. But it did. Just because statistics say
an event is unlikely, doesn’t mean it’s never going to happen.
The world is full of things that are improbable, but come to
pass.’
‘Like what?’ asked Anisa, slowly stretching herself awake.
‘Like this train getting us to Paris.’
‘I was thinking more of a business example.’
‘Have you ever heard about the sad case of Jérôme Kerviel? He
was someone who was badly caught out because his assessment
of risk was wrong.’

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