financialpost.org – financial news

RISK VANITIES

A robber or fraudster normally takes time to plan their crime. Thus, proper risk management is not a sit-back-and-watch process. Risk monitoring is a component of operational risk management and is a continuous hands-on process. Handling operational risk properly is not a completely reactive process, investors must have a proactive risk attitude and devote their resources accordingly.
This is the first element of risk analysis. Stand on a steady business foundation, and then prepare to leap forward. More investors stood on quicksand, suckered by investment marketing hype – very groovy, but potentially fatal. This is the realisation – a dull, grey, concrete base lets you conduct a more balanced business evaluation. It involves evaluating risk scope and business objectives, then determining potential sources of danger or risk.
The slow and reliable tortoise always gets to the finishing line. Warren Buffett was chastised for investing in bricks and mortar or boring insurance; although it does sound boring, many of his businesses still survive and grow. Maybe “boring” is that corporate steadiness and foundation that the business community would rather shun in favour of the more groovy investments.
A problem that recurs in investment history is that investors tend to have short memories. The fascination with junk bonds, derivative contracts, IPOs and dot-coms came and went just like the Tulip craze in early Holland or the South Sea Bubble in England. This blind buying mania, although rooted in the 17th century Dutch tulip craze, will continue to recur within the tragedies of poor investment decisions. These problems will revisit us in the 21st century.
Every one or two years there is a market fad. Whether it is bell-bottom jeans, wide lapels or pet rocks is anyone’s guess. Every now and then there will be a new technology, such as biotech or dot-coms to dazzle the eye, or some obscure country that demands investors’ money. Salespeople, investment advisers et al. are paid a fee or commission by banks and funds to sell their products to clients.
(analysts’) research was largely and openly used as a sales hook for investment banking clients. Research could also be used to punish companies. In one instance a company was downgraded by Merrill Lynch when it did not get the company’s investment banking business, and in another example, a stock was downgraded to please a competitor.
Many of these investment ventures have not got a slightest hope of winning. People are still oversold on junk.