{"id":17975,"date":"2023-03-16T23:56:00","date_gmt":"2023-03-16T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=17975"},"modified":"2025-05-18T09:04:06","modified_gmt":"2025-05-18T01:04:06","slug":"risks-investors-should-face","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/","title":{"rendered":"What are the risks investors should face up to?"},"content":{"rendered":"\n<p>In <a href=\"https:\/\/berkshirehathaway.com\/letters\/1993.html\" target=\"_blank\" rel=\"noreferrer noopener\">Buffett&#8217;s 1993 shareholder letter<\/a>, Buffett explained in detail the risks that stock market investors should face up to and why they should invest in the broader market index.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#One_good_idea_a_year\" >One good idea a year<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#The_definition_of_risk\" >The definition of risk<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#Beta\" >Beta<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#Risks_that_should_be_assessed\" >Risks that should be assessed<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#Its_not_easy_to_figure_out\" >It&#8217;s not easy to figure out<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#Refuse_to_accept_a_single_huge_bet\" >Refuse to accept a single, huge bet<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#Index_investment_suits_most_people\" >Index investment suits most people<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#Active_investors_can_build_portfolio_with_5-10_targets\" >Active investors can build portfolio with 5-10 targets<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"One_good_idea_a_year\"><\/span><em> One good idea a year<\/em><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Charlie and I decided long ago that in an investment lifetime it&#8217;s just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire&#8217;s capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically. Therefore, we adopted a strategy that required our being smart &#8211; and not too smart at that &#8211; only a very few times. Indeed, we&#8217;ll now settle for one good idea a year. (Charlie says it&#8217;s my turn.)<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_definition_of_risk\"><\/span>The definition of risk<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>The strategy we&#8217;ve adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as &#8220;the possibility of loss or injury.&#8221;<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Beta\"><\/span>Beta<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Academics, however, like to define investment &#8220;risk&#8221; differently, averring that it is the relative volatility of a stock or portfolio of stocks &#8211; that is, their volatility as compared to that of a large universe of stocks. Employing data bases and statistical skills, these academics compute with precision the &#8220;beta&#8221; of a stock &#8211; its relative volatility in the past &#8211; and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Risks_that_should_be_assessed\"><\/span>Risks that should be assessed<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>In our opinion, the real risk that an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake. Though this risk cannot be calculated with engineering precision, it can in some cases be judged with a degree of accuracy that is useful. The primary factors bearing upon this evaluation are:<\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>1) The certainty with which the long-term economic characteristics of the business can be evaluated;<\/em><\/li>\n\n\n\n<li><em>2) The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;<\/em><\/li>\n\n\n\n<li><em>3) The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself;<\/em><\/li>\n\n\n\n<li><em>4) The purchase price of the business;<\/em><\/li>\n\n\n\n<li><em>5) The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor&#8217;s purchasing-power return is reduced from his gross return.<\/em><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Its_not_easy_to_figure_out\"><\/span>It&#8217;s not easy to figure out<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>These factors will probably strike many analysts as unbearably fuzzy, since they cannot be extracted from a data base of any kind. But the difficulty of precisely quantifying these matters does not negate their importance nor is it insuperable. Just as Justice Stewart found it impossible to formulate a test for obscenity but nevertheless asserted, &#8220;I know it when I see it,&#8221; so also can investors &#8211; in an inexact but useful way &#8211; &#8220;see&#8221; the risks inherent in certain investments without reference to complex equations or price histories.<\/em><\/p>\n\n\n\n<p><em>Is it really so difficult to conclude that Coca-Cola and Gillette possess far less business risk over the long term than, say, any computer company or retailer? Worldwide, Coke sells about 44% of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market. Leaving aside chewing gum, in which<br>Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Refuse_to_accept_a_single_huge_bet\"><\/span>Refuse to accept a single, huge bet<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Of course, some investment strategies &#8211; for instance, our efforts in arbitrage over the years &#8211; require wide diversification. If significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually-independent commitments. Thus, you may consciously purchase a risky investment &#8211; one that indeed has a significant possibility of causing loss or injury &#8211; if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities.<\/em><\/p>\n\n\n\n<p><em>Most venture capitalists employ this strategy. Should you choose to pursue this course, you should adopt the outlook of the casino that owns a roulette wheel, which will want to see lots of action because it is favored by probabilities, but will refuse to accept a single, huge bet.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Index_investment_suits_most_people\"><\/span>Index investment suits most people<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when &#8220;dumb&#8221; money acknowledges its limitations, it ceases to be dumb.<\/em><\/p>\n\n\n\n<p>Regarding the investment in the large-cap index, please refer to my previous blog article &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/12\/04\/u-should-invest-etfs\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why most investors should invest ETFs tracking broad market?<\/a>&#8220;.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Active_investors_can_build_portfolio_with_5-10_targets\"><\/span>Active investors can build portfolio with 5-10 targets<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>On the other hand, if you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you. It is apt simply to hurt your results and increase your risk. <\/em><\/p>\n\n\n\n<p><em>I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices &#8211; the businesses he understands best and that present the least risk, along with the greatest profit potential. In the words of the prophet Mae West: &#8220;Too much of a good thing can be wonderful.&#8221;<\/em><\/p>\n\n\n\n<p>As for the number of stocks recommended by famous investment masters, please refer to my previous article &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/08\/18\/why-concentrated-investment\/\">Why concentrated Investment?<\/a>&#8220;<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"212\" height=\"118\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2023\/02\/risk-1600x1200-1.jpg\" alt=\"risk\" class=\"wp-image-17977\"\/><figcaption class=\"wp-element-caption\">credit: mintos.com<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"block-d8a344e9-4edc-4dc1-b981-40aa61d258b5\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul id=\"block-1b4a90da-e6eb-4658-9995-6b98224c83ec\" class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/06\/10\/game-of-chance\/\" target=\"_blank\" rel=\"noreferrer noopener\">Investing is a game of chance<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/05\/17\/risk-vs-uncertainty\/\">Risk vs Uncertainty<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/\">Permanent capital loss is the biggest risk that investors must face<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/04\/16\/vaguely-right-than-wrong\/\">I would rather be vaguely right than precisely wrong<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/\">What are the risks investors should face up to?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/10\/02\/investment-uncertainty\/\" target=\"_blank\" rel=\"noreferrer noopener\">The uncertainty in investment<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/03\/10\/investment-vs-speculation\/\">Investment vs speculation<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2024\/02\/28\/factor-luck\/\">How big a factor does luck play in investment success?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/09\/06\/chance-of-making-mistakes\/\" target=\"_blank\" rel=\"noreferrer noopener\">Invest success depends on less chance of making mistakes<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/08\/18\/why-concentrated-investment\/\">Why concentrated Investment?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/12\/04\/u-should-invest-etfs\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why most investors should invest ETFs tracking broad market?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/10\/13\/why-modern-portfolio-theory-unreasonable\/\">Why Modern Portfolio Theory Unreasonable?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/05\/15\/diversification-investment\/\">Diversification investment is deadly to portfolios<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Buffett explained in detail the risks that stock market investors should face up to and why they should invest in the broader market index.<\/p>\n","protected":false},"author":1,"featured_media":17977,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11,45,46,80,779],"tags":[],"class_list":["post-17975","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buffett","category-etf","category-market-index","category-portfolio-management","category-risks"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17975","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=17975"}],"version-history":[{"count":25,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17975\/revisions"}],"predecessor-version":[{"id":36388,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17975\/revisions\/36388"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/17977"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=17975"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=17975"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=17975"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}