(*) Risk vs. Reward (Not!)

We have been brainwashed by our business school and the wall street and have taken for granted that we must RISK MORE in order to reap higher yield or REWARD.

while it is true to some business model, one should realize this Risk/Reward concept actually came from speculation/gambling where the rule of the game's pay out is designed such that the house has the advantage. And to gain higher reward, they want YOU to risk more.


As a practitioner of secured investing, I know this is not necessary true but have found it sometimes difficult to explain. In fact, the whole concepts of secured investing is to find out how we can gradually increase return without necessarily taking on additional risk.

So I was enlightened when Buffet echoed my view with the following. Here is what he says:

"I [Warren E. Buffett] would like to say one important thing about risk and reward. Sometimes risk and reward are correlated in a positive fashion... The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is."

In that one paragraph, Buffett summarizes the central concept of "margin of safety", "value investing", and how profitability can be realized without being correlated high risks.

That essentially captures the objective of types of projects Secured Investing Institute are looking at. Join our journey if you find the "whacked out" concepts fascinating and true!

(*) Review of Benjamin Graham's "The Intelligent Investor"

Book Reviewed: Graham, Benjamin. (2003) The Intelligent Investor. Revised Edition. Updated with new commentary by Jason Zweig. Harper Business Essentials.

Investing securely is not a new concept. Yet, too frequently, we still confuse investing with speculation. [See Investment vs. Speculation]

Much of the concepts and discussion that are being carried out in the Secured Investing Institute has been discussed by the Mentor and Friend of Warren E. Buffett, Benjamin Graham. Secured Investing Institute (SII) go a step further in our criteria. Our biggest criticism of Graham's work is the limitation on analysis focus on stock and bonds only and completely ignore many other financial vehicles including mortgages, real-estate, and other non-publicly traded business, instrument, and derivatives.

However, for a novice investor, this book provides some of the basic concepts and more importantly provides validation for the skeptical investors the similarity of principles advocated by SII and those principles utilized by Buffett - arguably the most successful investor of current time and the second richest person in the world as ranked by Forbes magazine in 2004.

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Below is a review of some of most important concepts in my opinion.

"An investment operation is one which, upon thorough analysis, promises accept of principal and an adequate return".

1. You must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock;

2. You must deliberately protect yourself against serious losses;

3. You must aspire to "adequate", not extraordinary performance.

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Type of Investment Vehicle Not Directly Correlated with Safety

Conventional wisdom may rank the risk level of different instrument in the following wages

<-- More Risk -------------------- Less Risk -->

Private Equity> Public Stock > MBS > Bond > Real Estate > CD

Yet, for those believe Bond is More secured than Stock. Just take a look at what happened on May 9, 2001.

WorldCom, Inc. sold the biggest offering of bonds in U.S. corporate history - $11.9 billion worth with yields of up to 8.3%. [ See Yield Benchmark and Level of Investor ]

-WorldCom filed bankruptcy in July 2003.

-WorldCom's bonds defaulted when the company could no longer cover their interest charges; the bonds lost more than 80% of their original value!

Lesson: do not simply based your investment decision by the category of investment. Look beyond it. Know there are stocks that are safe and unsafe, bonds that are unsafe and very safe, real-estate purchase that could bubble or completely secured. Often you need to know the people behind it. What collateral are backing it up.

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Graham's also distinguishes between "Passive Investor" and "Enterprising Investor" or Active Investor and recommends three fields of active search of investment

1. The relatively unpopular large company
2. The purchase of Bargain issues
3. Special Situations or "Workouts"

Graham's Rules of Investment

"...depends in the first place on a choice by the investor of either the defensive (passive) or aggressive (enterprising) role. The aggressive investor must have a considerable knowledge of security values - enough, in fact, to warrant viewing his security operations as equivalent to a business enterprise. "

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"The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell."

In fact, if you read Berkshire Hathway's Annual Reports , you would find they almost completely rely on the book value or intrinsic value and not based on the market price in valuation. How you value and value conservatively is a fundamental aspects of secured investing.

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Some Successful Fund Investment Characteristics

1. The fund managers are the biggest shareholders.
2. They are cheap.
3. They dare to be different.
4. They shut the door.
5. They don't advertise.

Signs to get out of a fund

1. a sharp and unexpected change in strategy
2. an increase in expenses
3. large and frequents tax bills
4. suddently erratic returns

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Finally, the concept of "margin of safety" as the central concept of investment is a must read for every secured investors. The key here is to avoid losses or big losses. There's a very illustrative figure the explains the cost of loss wherein, a 50% loss on year one, would take 10% gain every year for 16 years to beat a 5% gain every year without the 50% loss in the first year!!!

The concept of "margin of safety" is best seen in one of the investment approaches the institute likes. It is aptly called "we make profit when you buy and not when we sell" by Robert Kiyosaki. One of the form is purchasing distressed properties at 75% below Fair Market Value (FMV) advocated by Mark Kemp.

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Finally, the gem, is actually at the end of the book - the Appendixes.

In fact it is written by Buffet himself titled "The superinvestors of Graham-and-Doddsville". This is a must read.

It succintly discusses an unconventional view of Risk and Reward that parallels SII's view and summarizes the investment approach as "look for values with a significant margin of safety relative to prices". Completely in resonance with SII's view.

Is't it great, great men and women think alike!!!