Risks of Moving In and Out of Investments

Portrait of Warren Buffett Depicting Inspirational Quotes

"Since the basic game is so favourable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts" or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it." Warren Buffett

First and foremost emphasis everywhere in italics is mine to highlight the importance.

What Warren Buffett means in this expression is that he and his partner and close friend Charles Munger had realised that moving in and out of investments in wonderful companies like Gillette (the word it in the quote) based on minor and irrelevant changes, news and so called experts who generate unwanted noise over television channels, day in and day out, is a terrible mistake. 

Wonderful companies have a long track record of successfully navigating occasional business difficulties. Business problems are a natural part of doing business and every company worth it's salt encounters such difficulties and resolves them.

Warren Buffett say that he and Charles Munger had figured out that selling highly valuable stocks of such great companies can keep you out of the game (remaining un-invested or divested) which is far more greater risk than remaining invested (being in the game).

Risks of Dancing In and Out of Investments

In conclusion, the moral of the story is once you have identified excellent companies after a rigorous process of filtering and scrutiny, stay invested unmindful of frivolous news and predictions of so called experts.

Best Investments - Joke

Sometimes your best investments are the ones you don’t make.

I don't want my money to be invested in stock/ mutual funds . Where can I invest it and let it grow with absolutely no risk involved?

Dear Friend!

You seem to be extremely cautious and risk averse regarding investing. This is very good and very important principle. My Guru Warren Buffett, a master value investor, also warns repeatedly “Do Not Loose Money”. However based on his quote, “Risk Comes From Not Knowing What You Are Doing”, I ha”ve penned the article, wherein I have endevoured to show that risk does not lie in any particular instrument like share or bond nor is safety ensured by supposedly safe instruments

I am a value investor and like you and Warren Buffet is also highly risk averse. But being against risk does not mean shunning a particular class of assets or instruments but means learning and developing required knowledge to avoid risks.

I suggest you please read the book “Intelligent Investor - The Investors' Bible” and visit my blog “Value Investing” to learn safe and risk averse investing and become rich in the long term.

Thank you,

Anand

Please Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also.

Risk Comes from Not Knowing What You are Doing

Businessman jumping across the mountain taking risk

Driving an automobile is Not Risky; driving, without adequate training is – not only to the driver but also to all other unsuspecting road users, and that is why my Guru, Warren Buffett said, “Risk Comes from Not Knowing What You are Doing”.

Often I have heard people proclaim, sporting an, “I Know Everything” smile, that they diligently avoid investing in stocks, as it is Highly Risky.  On questioning how they had come to such a conclusion, they would invariably attribute the wisdom to their parents, teacher, colleague or friend. When questioned where they would prefer to invest, they would retort, with authority, “Corporate Fixed Deposits and Bonds – Rock Solid Safety”.  Sadly, after a few years, I have seen many of them Loose both Capital and Interest, and repent their poor investment decisions.

The moral of the story is, Risk or the Lack of It, does not lie in any particular instrument, but lack of knowledge.  A fixed deposit with a government bank in India indeed is as solid as rock, there is no doubt, but with an interest rate around 7% per annum and inflation near or above the rate of return, the “Value” of your investment is bound to be eroded for sure, over a period of 15 to 20 years.

On the other hand, if an investor had invested Rs.1,00,000 ($ 1470) in “NIFTY 50” in January 1995 and had simply forgotten about it, today in June 2016, it would have grown to Rs.809,400, a growth of 709% or a Compounded Annual Growth Rate (CAGR) of a whopping 32.99% per annum.  Even after an assumed, high, inflation rate of 10%, the investor would be left with a net return of 22.99%, Compounded Every Year!  So, Where Does Risk Lie? Not in the “Instrument”, certainly, but in “Ignorance”.