Weekly Thoughts 24 May 2013

‘If you want to be right for the race that really matters, don’t try also to be good in the races that are unimportant.’ Bruce Fordyce.

I have often commented that the word Risk in the investment world refers to the probability of a permanent loss of your money. I have also made bold statements at times that I think there is a greater risk to capital that is deposited in a bank than if it owns a good equity unit trust fund that holds Woollies and Pick n Pay shares, for example. Paul Cluer, the MD at Foord Asset Managers, talks in their recent quarterly publication about volatility of returns as not being a suitable measure of investment risk and that the investment fraternity seems preoccupied with this measure for determining risk. I chatted to him on email this week to tell him how I totally agreed with his comments and how I constantly had to explain to my compliance office why I did not use the expected format of a risk profile for a client. In her defence, she won’t understand this because she is a legislative enforcer and not a practicing financial planner.

He goes on to say that equities will have the widest range of returns because the market constantly struggles to put an accurate value on listed companies and changes its mind frequently over the short term, leading to price [not risk] volatility and that Risk means different things to different people, but it most assuredly is not volatility.

Remember, the fluctuation of price, does not mean the fluctuation of value, neither does it mean the fluctuation or risk of the dividend payment of the underlying company. Its just the flea market going through the motions.