Acceptable Risk

BY William Cate

Acceptable Risk
By
William Cate

Ask not how much money you will make in an investment, but rather how likely you are to lose your risk capital.

If you focus on risk avoidance, you are more likely to make a real profit from your investments. Conservative investments, like bank deposits, bonds, T-Bills, etc, are certain losers. The interest paid on conservative investments is less than your costs of inflation and taxation. Your savings are slowly being eroded by time. Consider a 4%25, six-month CD. After State and Federal taxes, your CD is earning about 2.4%25. Inflation is currently about 7.5%25. You are losing money at the rate of about 6.1%25/year. In less than twelve years, your savings plus the retained interest payments will buy half as much as your savings did the day you put them into the CD. Conservative investments are always losing investments over time.

What's acceptable risk? It's the balance of risk and reward so that you are among the few winners in the investment game. Most high interest investments are at least too risky to consider and many are outright swindles. If the investment offer doesn't make sense, don't invest. If the offer sounds too good to be true, odds are it isn't true. Avoid "get rich quick schemes. Accept some responsibility for ensuring a positive outcome for your speculative investments. If they just want your money, odds are you are going to lose your money. Common sense should allow you to reduce the potential speculative investments to a few that require some serious Due Diligence, before you write a check. Do the needed Due Diligence or expect to lose your money.

Would you risk your money on any of these offers?

1. You are given 7,333 shares of a publicly traded stock that is currently priced at US$40/share. You are asked to hold the stock until an acquisition by a multinational corporation is completed. Would you accept the shares? Since there isn't a chance that you could lose a dime by accepting the terms of this offer, you would be foolish not to accept the shares.

2. You are given 7,333 shares of a publicly traded stock that is currently priced at US$4/share. You are required to hold your shares for five to seven years. Since there isn't a chance that you could lose a dime by accepting the terms of this offer, you would be foolish not to accept the shares.

3. You are being asked to buy US$6,000 worth of publicly traded shares and sell them into the market. You will repeat this process several times. Your goal is to end up with 7,333 shares that cost you nothing, but that you must hold for several years. You are potentially at risk $6,000. As to how great a risk, that depends on the probability of being able to sell the shares at the targeted profit. This is where the concept of acceptable risk becomes a factor. There is no such thing as a risk-free investment. If you conclude that the odds favor being able to sell the shares at a profit, you should risk the $6,000. The offer, if all things work as planned allows you to risk $6,000 for a short period and after a required hold period of five to seven years, sell the 7,333 shares for about US$293,320.

If you were a gambler, looking at the amount to be risked and the potential reward, you would motive you to wager your money. However, the prudent speculator should carefully consider the risks of getting from a potential loss of $6,000 to the point of having recovered your risk capital and having no risk of loss in the ensuing years to the sale of your 7,333 shares of stock.

If you're an accredited investor and this type of speculation appeals to you, you should consider attending a Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] Orientation Meeting. It's become the largest venture capital club in the world because it offers a favorable risk/reward ratio that is acceptable to many investors who realize that it's easy to safely lose your money. It's hard to actually make money.

There are things you should consider.

1. Conservative investments are losing investments thanks to inflation and taxes.

2. Investigate any investment that appears to offer better than a breakeven return on your risk capital.

He is the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/]. He's the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/] He's a Venture Capital %26 Equity Finance Consultant
[http://home.earthlink.net/~beowulfinvestments/williamcateventurecapitalampequityfinanceconsultant/]

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