Ramblings on Risk (Part 1)

What is risk? Inquiring minds want to know!

The second line is not misplaced. It is, of course, the tagline from the National Enquirer, the flagship publication of American Media. American Media plans to file for bankruptcy later this month in a prepackaged Chapter 11 filing. The risks of publishing in the era of the internet, iPad, and smart-phone news caught up with the tabloid producer.

So what is risk? Many economists have tried to define it as the volatility of return. Certainly American Media’s return was volatile—their revenues have declined so much that they can’t make their debt payments. But volatility seems too insipid a term to describe the loss of millions of dollars and hundreds of jobs. A squiggly line doesn’t capture the gut-wrenching fear that risk brings.

Some have described risk as the permanent loss of capital. This seems appropriate. The owners of The Inquirer certainly saw their investment depreciate. But what do they mean by loss? The original cost? The high-water mark? Something else?

Risk is uncertainty. There would be no such thing as risk if everything were known. Intense focus on measurement tools—bell curves, probability, statistics—can obscure the fact that investors can simply be wrong. Markets have a way of consistently finding new ways to make you look like an old fool. In the long run, risk control wins the game.

But this begs the question as to how to control risk. In the end, we don’t know what the future holds. Our investments need to reflect this.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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