Investor Risk Profile Survey

One lesson learned from the global financial crisis is that the markets we invest with, and we trust to be regulated and efficient, are possibly not worthy of our investment and trust. Since there are no other markets for investing, and interest rates available to savers are lower than inflation (hence savers will lose purchasing power/money), what do you do. If your answer is do what I've always done because it will get better, you may be the answer to the rhetorical question "who is the bigger fool".

It is essential someone understands the risk your investment capital is exposed to. In a previous post, risk was discussed in more depth, to explain the concept. One of the points found in that post is for investors to understand the probability of negative or positive outcomes. Think of investing from the perspective of gambling centers such as Las Vegas, Macau or Monte Carlo. When you arrive in town, you become a number in a statistical formula that attempts to predict the odds for where you will spend your cash and how much you of your cash you will leave with. What do you understand about the ways to spend or keep your money in their town? What do you understand about how to increase your cash while playing in their town with their games and their employees?

Stock Market or Market System?

Today we saw unprecedented volatility occurring within a few minutes. The explanations coming out of news services leave me unsatisfied that there is anyone taking time to think before they publish something. I suppose there will be time for that later. Now however, there are some observations being made that make me wonder. The financial crisis in Greece is the easiest and most obvious topic area for initial focus. But there has actually been some signs of responsibility from the government of Greece in that they passed an austerity plan yesterday to show good faith to the world, that they will begin to spend less beginning now. Greeks are rioting in the streets on that but they are not investors who can move the markets. Is this an example of "buy the rumor, sell the news"?

There have also been reports of errors being made on trading systems. This news is going to take awhile to get facts on. Here is the beginning of a report, based on rumors, from CNBC, always fair and factual... LOL, In one of the most dizzying half-hours in stock market history, the Dow plunged nearly 1,000 points before paring those losses—all apparently due to a trader error.

So far, here are pieces of today's news, all from Bloomberg, that covers the bulk of what might have influenced markets today.

Risk receptive or risk averse? What is risk?

Today I am reading an article by John Hussman titled "Clarity and Valuation" that, among other things, describes very simply his definition of risk and when he feels receptive and averse. John Hussman is a mutual fund manager and so his point of view has daily value to him and his investors. He is analyzing the probability of risk as opposed to forecasting risk based on fundamental analysis.

What is risk, first of all? When describing risk to a client I would say, the historic returns for this investment over a certain time period are this number. The relevant index for the same time period resulted in this number and the potential for a different number, higher or lower, is the 2X standard deviation number, normally a big number. The larger the standard deviation, the higher is the range of potential returns. What Hussman does is reduce the expected returns to the typical outcome associated with the conditions observed in the economy at this point in time, and includes a range of other possible outcomes as well. Here is more from the Hussman article described earlier...