How to measure risk? Is volatility the best way, it’s certainly most commonly cited?
No. Volatility is not the best measure. A stock that goes up 50% in a month just experienced huge volatility – don’t think any investor cried foul for that result.
Risk is something more real. Risk certainly involves fear. Maybe the downside volatility or drawdown* is a better metric.
Indeed – we make risk concrete – palpable in a way investors find useful.
How low did Nvidia stock go during 2022? What about 2008? How about the shoemaker CROX? Are you as an investor willing to hang on to that stock if it happens to your favorite one? What if you had a smaller position – only a ¼ of what you currently have – would you be greedy**, and even buy more if the stock dropped 50%?
We do this thinking methodically, for Trefis portfolio strategies (example, HQ scored >105% cumulative returns since inception – and outperformed – see HQ portfolio strategy metrics).
So – what really is risk? To investors managing real money – risk is if YOU sell when/if CROX drops 40% or 60% in the next downturn. Sell it all. Yikes. Only to watch it 3x from that level. That’s horrible. And, that’s your risk. It’s personal to you.
So yes, risk is not knowing how low your favorite stock dipped during the 2020 pandemic, or 2022 inflation shock. Risk is – in fact the real loss of capital when/if that event that already had a real chance of happening – happens – and then you’re not prepared.
We’ve launched our ‘How low can it go’ – downturns compared – module – compare Nvidia indeed with Microsoft and Travelers, – why not, or any other ticker. So you can see the worst drawdown, and act on it.
Act how? Maybe you can right size your position, and prepare for it. Maybe you write down a plan – share with a friend or your wife. Or talk to an advisor.
Only you can judge what you fear – and what position size you need. We believe you want to be greedy if the price drops*, not fearful. No excuse for not knowing any more – what’s your risk!
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*Drawdown, or max drawdown can be considered risk – however, if you don’t liquidate, and the stock recovers, is it really a risk for you?
**Of course – hanging on to something that you don’t believe in any more – where fundamentally the company’s prospects have changed, and it’s no longer the right bet for you makes no sense either.
