risk from a vi perspective

Question 1

risk concept and definition

Answer 1

possibility of occurence:
-possability is always subjective as impossible to determine but help as proxies, knowing event we analyse we can use experience

adverse outcome:
-subjective as what to consider highly negative

Question 2

risk measurment

Answer 2

-not possible to measure risk mathematically
-it is personal guesstimate of the future
-no standard for quantification as subjective
-can say which outcome is most likely but doesnt say everything about the future

Question 3

permanent loss of capital

Answer 3

-most adverse outcome is the possibility of permanent loss of capital
-main goal is to avoid losses, most patient and methodical people are winners in investing

Question 4

uncertainty

Answer 4

-uncertainty cannot be quantified or measured
-concept of risk has absorbed notion of uncertainty because of modern finance
-origin is inadequeate use of natural science methodology in finance
-risk is known unkwon and uncertainty is unknown unkowns
-uncertainty is more qualitaitve, cant really name the aspcets, more external factor that we cant predict
-risk is the probability of the occurence of a certain outcome

Question 5

dealing with cognitive errors and behavioral biases

Answer 5

-being aware of existence and using willpower not enough
–>detect which are the biases and mental traps which we are more exposed to and why do they originate
–>Develop a rigorous investment process to minimize the probabilities of making errors.
–>Follow the process rigorously and with discipline, even when during short periods of time (or not so short…) it doesn’t seem to
work and everybody around you seems way smarter than yourself.

Question 6

entrepreneurial skill and fundamental analysis

Answer 6

▪ The chances are that we as investors won’t have a higher-than-average entrepreneurial skillset and, therefore,
the margin of safety, fundamental analysis, diversification and weight management have a higher relevance.
▪Everything starts with a deep and thorough analysis of the company, both from a qualitative and quantitative perspective.
–>noshortcut or substitute for this
▪Understand the business, main levers of value, potential risky outcomes.
▪be conservative for estimates and assumptions.
▪ most of the industry doesn’t follow fundamental analysis

Question 7

margin of safety

Answer 7

-difference between estimated value of company and its market price
-more room for failing estimates or unexpected events
-riskiness and uncertainty need to be put in context with the price you are paying

Question 8

diversification

Answer 8

should know that already from economic fundamentals!