 Do you know what is risk? Do you measure it properly? Do you approach investing from a good risk reward perspective and do you see risk as academic seed or as proper billionaire investors seed? Investing is all about first risk if you listen to the billionaires like Warren Buffett, Seth Claremont, Ray Dalio, Charlie Munger or about volatility if you listen to academics that are only rich because of the inflation of academic prices in the last 30 years, nothing else because you overpay for those degrees with all the student loans and everything so that's inflation, big inflation. Apart from that by the end of this video you should know exactly how is risk defined from an academic and from an investing perspective what is the best approach to risk for yourself because that's the key always investing is about you first and then you're going to see also a few examples of how one method works and the other method works and a little bit about the history of risk to quote Seth Claremont what most investors do wrong is they are primarily oriented towards return how much they can make and pay little attention to risk so this video is all about paying attention to risk the definition of investment risk that you learn at school investment risk is usually defined as a sum of the following market risk that includes equity risk currency risk interest rate risks and then a dozen of other factors like liquidity concentration credit risk inflation risk horizon risk etc etc however all those things then supposedly go back to what is market risk and the general security is also compared to market risk then we come to the academic measurement of risk that's different than what the billionaires do academics measure risk as standard deviation what is standard deviation standard deviation is a measure of volatility how much the price of a security is more volatile in relation to a portfolio or a market the more volatile a stock is the more it's considered risky so risk is measured from what the market says about a stock oppositely investors they measure risk from what the business carries so what is the business risk what can go wrong with the business the dividends in the future etc etc not what the market says about it buffets definition of risk is then again different from standard deviation risk is not knowing what you're doing that's something that can't be measured by standard deviation what you don't know Ray Dalio who is famous for his all weather portfolio where it is all about proper allocation of risk among uncorrelated asset classes and nothing else is a bit more vague than Buffett and says risk comes from what you don't know and that's a big difference from learning as Buffett you can learn what you don't know but according to Dalio you there is always something you don't know however to be more specific and applicable Claremont describes risk by both the probability and the potential amount of loss this is the key the probability and the potential amount of loss so what can go wrong how much do I lose if that happens and then compare that to all other investments and compare to the return this simply means that the risk includes the probability of something going wrong and the amount of loss if things go wrong to finish with manger risk to us is one the the risk of permanent loss of capital permanent they don't care about volatility short-term what can go wrong in the permanent term and the risk of an inadequate return where it means that the investment a that delivers lower than in other options they had to invest at that moment in time with perhaps less less risk so what definitions to use standard deviation or permanent capital loss and probability let me show you an example to give you a better insight on what we discuss here so this is the stock of nevson resources a miner that I was covering for a while and you can see how the stock is really really volatile it was around around 220 in 2016 January then it went up to 3.7 3.8 down up up and down down mostly in 2017 when in touched on two dollars and now it is almost 100 up at 3.74 so this according to standard deviation would be extremely risky especially as there were four and more spikes of plus minus 20% just in the period of 2017 not this not really looking at these big spikes of 50 70 100 percent when comparing that to the sap 500 that had just two declines of 9 10 percent and all of them came in april and january of 2018 then you can say okay nevson was a crazy risk investment while the sap 500 was a stable investment however value investors approach risk from a different perspective they don't look at the stock price they look at the actual business value of the business of the stock how would manger say using a stock's volatility as a measure of risk is nuts so with nevson you had the business you had the mine you had real assets in the ground so that was the value and then you had to see okay if all goes wrong in the long term what's the value of that metal in the ground for the long term and that was your permanent capital loss the upside was okay what will someone pay for that metal in the ground which is now 3.74 that's the price that will land in that landing just offered so that was the risk reward the risk was okay what's the lowest value of that metal in the ground for permanent capital loss short-term panics you see what happens to the stock on the other hand nobody looks at what is the risk of the business of the sap 500 if interest rates go up and people require higher dividends from stocks the sap 500 crashes hugely that's the risk reward there and that's the difference between academic and investing risk measurement so how to measure risk for yourself really look at what you own what can go wrong from a business perspective investing in stocks is investing in the underlying businesses so okay what can go wrong there for permanent capital loss what can is the probability for that what is the return if you invest in stocks now you can expect four to five percent long-term return is that an adequate return for you or you can find better returns so that is investing risk as for standard deviation the sap 500 went nothing but up for the last what nine years so there is little little very little risk there from that perspective because the volatility is extremely low at least it has been but it's still extremely low in historical terms this doesn't mean that the sap 500 isn't risky if something didn't happen in the past eight years doesn't tell anything about what might happen and that's the difference between academics and practitioners just on the history of risk i researched risk a lot for my phd and what surprised me was the divergence between the psychological aspect of risk and the academic one night already 1927 distinguished between the psychological personal segments of risk the qualitative and the quantitative what the market focuses on so there is again you as a person how will you react to what might happen in the market is then perhaps even the most important risk as would Buffett say or Graham sometimes the worst enemy of the investor is the investor himself and his action so all those nice fancy formulas are nice but you have to understand also you as an investor how will you react to what's going on further there is another deeper in thing to dig just a little bit deeper from this scratching the surfer on risk let's see what Nassim Taleb has to say according to Taleb Goldstein and Spitznagel from 2009 no forecasting model can forecast low probability events and high impact events low probability and high impact and that risk shouldn't be estimated using historical data because real events have a much larger distribution than mathematical models based on historical distribution of data can predict just an example of this think the subprime crisis how nobody predicted it in 2008 2009 dot com bubble in 2000 2001 etc etc there are all these things that happen constantly over time that nobody predicts beforehand and that's a black swan risk that's also something to think about so I hope I haven't give you too much I haven't scared you too much but I have given you food for thought to think first about risk before investing in something and only then about reward then when you compare all the risk reward risk reward risk reward what can go wrong what's the possibility of permanent capital loss what's the possibility of an inadequate long-term investing return then you will find you will start finding better and better investment opportunities out there and that's the key to long-term successful sustainable successful long-term investing if you like this approach please subscribe to the video if you like this approach when investing please check my stock market platform thank you for watching looking forward to your comments and I'll see you the next video