An Investor always takes into consideration the risk-reward ratio. Really, one is interested in investing propositions that offer a higher reward in comparison to the amount of money one is risking. There is also another factor that influences an investment decision, that is the risk tolerance.
Are you a risk averse investor or risk tolerant investor? This article will help one to understand what is a calculated risky investing method or strategy. Let's get started.
What Is Calculated Risky Investment?
It is an investing method that carries higher risk than a normal investment but is also susceptible to create large unexpected rewards. It is a calculated risky investment because one is willing to take on those risks even though one knows that one is more likely to lose.
In that instance, one is investing because one does not mind to lose. Note that a calculated risky investment is not gambling in the proper sense of the word, but an intelligent investment decision that carries a higher risk than normal. The flip side of that calculated risky investment is the possibility of larger rewards.
One is not just buying and hoping that God will do the heavy lifting while one is crossing fingers, nails, hair and toes.
What Is Gambling Investing?
One is gambling as an investor when one buys a financial instrument like one buys a lottery ticket. It is like, hum! I will buy that, that and that because one thinks they are golden nuggets. One does not know the risk one taking. One just want to get paid.
Contrary to the gambler, an investor that is taking a calculated risk understands the risks, and most importantly why he wants to take them. I mean he or she can explain why it is worthy taking that calculated risk.
Examples Of Calculated Risky Investing
The first example is when one knows that it can take a long time before one can get one's money back, but one decides to take a calculated risk.
I know that there is a higher chance that I will get my money back or make some profit but I also understand that it may take more than ten years before that happens. That is a calculated risk investing with a risky time factor.
Note that the longer one is holding a position the higher is the risk because the financial markets can swing up or down anything due to external and internal factors.
The second example relates to the risk-reward ratio.
Suppose one buys a stock for $10, but the average debt per share is $20. Really one is buying at $10 loss per share as soon one hits that buy button. As you can see, at face value, it is crazy to consider that investment proposition. Right?
Now imagine, one is an expert in picking risky assets that quickly become valuable over few years. One notices that an ongoing restructuring is maturing for sometimes. The management is now willing to repurchase their own shares at the right price and pay dividends. The balance sheet is being actively pruned and the insiders are buying.
After all those considerations, one decides to buy the stock at $10 though the debt per share is $20. In that instance, one has taken a calculated risk with a financials risk factor.
The Third Example of a calculated risky investment strategy is to buy an asset that has failed the Google finance acid test.
Yes, one has tested it and it badly fails the Google finance acid test. Right? One also understands that it means the company in the short term is financially under pressure to satisfy its short term creditors if it is put under pressure.
However, the management is not giving up, but putting in place measures that creditors really like. One of those measures may be complying to creditors demand of keeping both dividends and shares buybacks on hold.
After taking time to weight the risk-reward factor, one sees that there is a high chance that the company will survive the short term crunch, and remain in business in a foreseeable future. After all, one decides to take a calculated risk to buy it.
Beauty Of Calculated Risky Investing
The gorgeousness of a calculated risky investing is that one can be rewarded multiple times against all odds if one is proven right.
It means, one has effectively spotted the future value of company before it comes to light to even the market analysts. On the other hand one will lose all the initial capital if one is wrong. One understands that, but one is also OK with that.
One has an unfair advantage if one is right because one can add more positions as it is becoming clearer that one is right to take that initial calculated risk.
A clever risk tolerant investor who takes smart calculated risk can blow other market players out of the water with gigantic gains that can only cause envy and jealousy.
Becoming Calculated Risk Investor
Obviously a calculated risk investor has some sort of experience, and knows exactly what he or she is doing. Right?
Therefore, that is not for anyone who is trying to make a quick buck. Having said that, one can become a calculated risk investor over the years as one is becoming a better investor.
One may spot a risky investing strategy and may say: I wonder what would happen if I try this or that. And the next thing, one begins to put in place a strategy that is ready for an experiment using a demo account.
I will also say that one may decide to open a calculated risk portfolio that one uses for that sole purpose. In fact a risk averse investor can also change over the years, and begin to try other investing methods that carry a bit more risk.
Money For Calculated Risk Investment
All investment fund in a calculated risk investment account should be considered lost. One will not call one's mother or cry if one loses those funds.
Of course, there is no emotion attached those funds because they are like soldiers at far front in the heat of a battle. It is go, go and go. Everyone knows the risk.
It is not about playing Russian roulette or gambling, but using an intelligent risky investing tool. Though the risk is high, one can still be rewarded abundantly if one is right.
Therefore, one must not cut any corner in that instance. It has to be the 5% money management, nothing but the 5% money management. I mean the whole 5% money management.
I will go further and say the 5% of 5% that is destined for the 5% money management rules should be deployed for all calculated risky investment play.
When it comes to taking a calculated risk as an intelligent investor, one must have enough proven experience and skills to defy the odds of losing the initial investing capital.
Frankly, one should not use children's money for that purpose. Yes, the risk one is taking is very high, but one can be having the last laugh all the way to the bank if one is proven right against all odds. This is not about gambling but calculated risk investing method that works.
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I wish you the very best. Happy Investing To All
This article is written by George Beaulieu Founder Of Stochastic-macd.com