 Good day, fellow investors. When it comes to successful investing, the key is not to pick the right stock. It is to not pick the wrong stock. And in this video, we are going to explain in detail what does Buffett actually mean when he says this. The first rule on investment is don't lose. And the second rule on investment is don't forget the first rule. And that's all the rules there are. I mean that if you buy things for far below what they're worth and you buy a group of them, you basically don't lose money. So avoiding losses is what actually allows your investments to compound over the long term and create amazing portfolio returns. The only investment strategy that focuses on avoiding losses, thus risk, is value investing. And in this video, I want to really explain in detail what is the core concept of value investing. This is risk. Focusing on risk, avoiding risk. And then letting everything else returns come on top of that avoidance of long term risk. Value investors also define risk in a different way. So we're going to start by defining risk. Why avoiding losses, avoiding risk is the best strategy over the long term. In the short term anything can happen. But over the long term your focus should be on risk. We're going just touch shortly. I'll make a special video on a margin of safety. I'm going to share with you my personal strategy when it comes to analyze stocks and looking at risk. It's pretty simple. Just look at what can go wrong. Compare it to the price and then see whether it is a good investment or not. Then we're going to conclude with why traditional measures of risks are not really good when it comes to value investing. So let's start. Now the definition of risk. It's not volatility. It's not better coefficient. The definition is risk is pretty simple. You look at the probability of loss and the probability or the potential. How much you can lose? So what's the probability of losing? How much you can lose? And what's the probability that things go wrong? And what would be the hit to your portfolio? When you invest with a margin of safety all those probabilities are minimized. Thus you have low risk and you let the return compound on that low risk. Risk is not volatility so that's something we'll discuss a little bit later. Now that we have defined risk we can also see how to analyze risk. Risk depends on two key concepts. One is the price paid. The lower the price paid is, the lower is the risk. No arguing about that. And the second concept again completely different than what academics say is the nature of the business. Textile mills in the 1970s were risky even if those had the margin of safety and everything because in the US the business was declining due to Asian competition. So you have to understand okay was the price paid compare it to the underlying value of the business and then also look at the nature of the business. What's the risk of the business itself when it comes to investing? Stock prices, volatility, all that is mumbo jumbo, no nonsense to entertain you but not really meaningful for value investors. And further it's actually impossible to know the risk beforehand before it materializes. Now investors in Amazon look like geniuses especially those that invested 20 years ago but many even invested in web web when which is a company that went bankrupt in 2001 2002. So now looking at Amazon includes a lot of survivorship bias because the risks didn't materialize and you look like a genius but there have been risks and other companies show what could have happened also to Amazon. So it's not that it is there weren't risks there were risks and value investors wouldn't have invested there like Buffett didn't 20 years ago. Now he did because he sees less risk and the focus when it comes to value investing is always on risk. So risk depends on the price paid. An excellent example of how risk depends on price is 3D. 3D printing it was so cool five years ago now nobody even talks about it but the market was exuberant stock prices exploded and it is an excellent example to show how to manage risk and how it depends on price. For example 3D stock in January 2014 was at $90. Now it is at $9 a few years before 2014 it was again at $10 $9. But if I look at risk and compare it to the value of the underlying business I would say that DDD was less risky at the price of 10 than at the price of 90. However in exuberance hoping that every production will switch to 3D printing investors cared only about the rewards not about the risk and therefore lost a lot of money especially those who invested at the peak 3D exuberance. Just a few years prior the P ratio was 20 so much less risk the company was profitable I don't know what happened later but this shows how the first thing when it comes to risk is price in this case the lowest risk for the stock was in August 2011 even after a 70% drop already happened in 2010. So don't focus on stock price movements when analyzing risk compare the stock price to the value of the underlying business and the nature of the business itself. Now the second part when it comes to investing risk is analyzing the risk of the business. What is the nature of the business and how risky it is. If you're launching missiles to space governments can simply say no and that's a very big risk. Here if you have I don't know a hotel in Paris it is a lower risk because tourists will always flock there if there isn't a terrorist attack. So each business has its risks to understand them you have to understand the business. I love to follow businesses and sectors for a few years then you really start getting those cycles understanding okay are we just in a downturn due to oversupply or is it something structural structural that affects the business and when you start focusing covering those sectors you start understanding the risks is oil now cheap or expensive what will happen no matter the noise on the news and you read reports you read long-term forecasts short-term forecasts you listen to those conference calls and you get a picture of the inherent business risk. When you find a business that has low risk or that has enough assets in the form of a margin of safety can be cash per share then you don't even care that much about the big business risk. So it's always a balance looking at everything that is there in the business outside the business so the question for me is always what can go wrong am I happy owning this business at the current price even if all that can go wrong goes wrong. If the answer is yes then for me it's a buy because the downside limit is long-term downside limit is limited of course avoiding risk completely avoiding risk is impossible to do even Buffett misses on some investments some go right some go wrong those that go right suffice to cover for those that go wrong but you never know what will happen in the future so there will always be misses however the key is also to structure your portfolio in a way to avoid huge losses because by avoiding losses you let your money compound and that's why to focus on risk is so important. If we look at recent hot stocks like Beyond Meat I got a lot of comments to analyze this and I would say that okay here investors are focused on huge growth projections those might happen those might not happen we are up more than 100% since the IPO here and I have received many many comments about this stock what to do can you analyze this but for me it's simply too risky I don't chase such fast profits and I'll show you now in an example why this is so important if we go to a stock that was very very hot just a while ago like Tilray it is currently down 78% from its peak in September of 2018 and when it comes to investing it's very very difficult to recover from a downturn of 78% if there are no fundamentals if it's not a temporary downturn if Tilray would have a book value of $60 then I would say okay this is just temporary the value with will get unlocked but I assume it doesn't have so it is very very risky for me and chasing such growth stocks can really hit your portfolio because when the growth stocks the stock usually gets torpedoed and therefore you lose a lot of money and it's very difficult to recover let me show you the importance of focusing on risks through numbers $1000 compounded at 6% for 30 years equals $5743 that's not a bad return you almost increase your investment for six times however just one hit of 40% in year 10 of the 30 compounding years would set you back to the beginning with $1013 in year 10 and give you a total return of $3251 or 44% less than without the one 40% portfolio hit so one yearly loss of 40% destroys 44% of long-term returns this doesn't mean your portfolio isn't supposed to go up and down if I would if my portfolio would fall 40% now I would deploy the 20% that I have in cash I would deploy the dividends and I'm 100% sure that my longer term returns would be even higher because what I own is value and what I own can only fall temporarily everything changes business nature global businesses cyclical so it always goes up and down and you have as a value investor wait for those opportunities to buy by those bargains if stock prices go down of value investments not off greedy growth stocks like tillray then I know I'll be buying more with everything that I can and increase my long-term returns this means that my investments have a margin of safety will make a special video about what is a margin of safety how to find a margin of safety what all can be a margin of safety there can be many many different margins of safety the more the merrier but when you buy with a margin of safety just to quickly explain you pay 50 cents for something that's valued one dollar when you find something like this and because the market stock prices depend on demand and supply for the specific stock it often happens that you can buy a dollar for 50 cents so a lot of things have to go wrong within the business for it to lose 50% of its underlying inherent conservatively analyzed value and this is margin of safety investing temporarily everything can happen you take advantage of those temporarily declines but when you buy value and real long-term value then you have nothing to worry about and your portfolio will compound over the long term and my favorite risk approach is I simply look at the business look at what's around this surrounds it usually I look at the whole sector and then I look what can go wrong and what happens in the worst case scenario and if I look okay worst case scenario how long can it last what can be a recession government issues whatever how diversified is the business debt financing structure everything and when I look okay what's the worst case scenario and we had many worst case scenarios in 2009 that ended up pretty pretty well for most investors and then you look worst case scenarios you compare it to the price always compare the value with the price when the price is close to the value in the worst case scenario or even below it then I'm a happy buyer and stock prices are so irrational so volatile that it is very often and we keep finding those opportunities where the value is much higher than the stock price even in these exuberant markets with 10-year bull market so risk has nothing to do with volatility as we already said it's not the beta coefficient it is impossible that past stock prices tell you how risk is something is it is about the business it is about the price compared to the underlying value not about what the market thinks about a stock 2009 stock prices were extremely down everybody was calling stocks risky risky risky but it was the best time to buy also don't worry about temporary price fluctuations focus on permanent business changes permanent business changes so be really careful when listening at the news look at the conference call check the stories long-term reports and then compare what's going on in the news with the margin of safety that your business has and the best way to summarize all of this investing wise is to go back to Buffett and his quotes so wait for the right pitch analyze as many businesses as you can and buy only when your criteria are met thus low risk high reward with the bottom-up approach when it comes to investing research opportunities come infrequently when it rains gold put out the bucket not the timble be ready to strike big when opportunities arrive and to conclude be greedy when others are fearful when stock prices go down others are fearful and fearful where when others are greedy thank you for watching if you like this value investing approach please subscribe to this channel that's all about value investing low risk investments with high potential rewards thank you and I'll see you in the next video