cut down the risk in investing  

redmustang91 57M  
8703 posts
7/27/2006 8:30 am
cut down the risk in investing

Leverage works in both directions. So borrowing works great when things go up, but takes you out when things fall. Long term investors who are cautious avoid leverage so they can stay in the game. Some advice from Charles Munger partner to legendary investor Warren Buffet:

"I know a man named John Arriaga. After he graduated from Stanford, he started to develop properties around Stanford. There was no better time to do it then when he did. Rents have gone up and up. Normal developers would borrow and borrow. What John did was gradually pay off his debt, so when the crash came and 3 million of his 15 million square feet of buildings went vacant, he didn't bat an eyebrow. The man deliberately took risk out of his life, and he was glad not to have leverage. There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table. We might all consider imitating John."

Palatial casinos are built in the desert because people find risk to be fun and exciting. I am not much of a gambler, so whenever I visit Las Vegas, I spend most of my time watching friends try their luck. One intriguing thing I have noticed is that when things are going well and money has been won, it is nearly impossible for many people to walk away from table. Instead, they take on more risk by betting larger amounts, even though the odds are clearly stacked in favor of the house. Taking on risk only makes sense when it is sufficiently outweighed by the potential reward, which is why we only buy stocks when there is a margin of safety. Otherwise, consider Munger's advice and imitate John Arriaga.

Become a member to create a blog