When Investing, How to Spot When Uncertainty Leads to Risk

Focus: STOCKS

Vitaliy Katsenelsen Image Vitaliy Katsenelsen Editor, Contrarian Edge

That is absolutely true. In theory, you’d think people who still had $1 billion would feel proportionately less pain than the average Joe whose stock portfolio fell from $300,000 to $100,000 and suddenly he can’t retire. I can’t speak for every billionaire, but Donald Trump would be devastated, as he cares deeply about his net worth and rank on the Forbes 400 list.

Uncertainty does lead to more volatility. We don’t, however, equate uncertainty with risk. This point is very important. Uncertainty equates to risk under only two circumstances: first, if your investment time horizon is not long enough to wait out an asset’s reversion to its fair value. For instance, if you have to write a check for your daughter’s wedding in two days and your portfolio is down 30 percent, then volatility and risk are one and the same, since your sale will result in a permanent loss of capital.

The second circumstance is when volatility is your master and not the other way around.

If you have done your research and believe a stock is worth $10, and the market prices it today at $4, you should celebrate and praise the gods of volatility for their gracious gift. Unfortunately, you need to have done the work to know what the company is worth, but this research would have given you the confidence to buy when most investors are hiding under their desks.

On this point, I find myself thinking not of Mark Twain but of another eminently quotable sage–Yoda. As he might have put it, “Embracing volatility we are.”

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