Stocks: This Is How You Should Invest | The Beginner's Guide to the Stock Market, Value Investing, ETFs, and Asset Allocation by Filibooks Finance

Author:Filibooks Finance [Filibooks Finance]
Language: eng
Format: epub
Publisher: Filibooks
Published: 2020-10-20T16:00:00+00:00

Undue risk

Taking undue risk can really sink an investor. But what is undue risk?

One answer is that it’s risk you don’t need to take to achieve the returns you want. If your investment objective is to grow your funds steadily by 8 percent a year, you don’t need to chase after penny stocks and tech start-ups. You can easily get that sort of return by picking quality mid-caps with a good track record.

Another answer is that you can avoid undue risk by always investigating and quantifying the downside risk as well as the upside potential of any investment you want to buy. Of course, technically the downside risk of buying a share is 100 percent (the company that you have invested in can go out of business and you can lose your entire investment): however, in practice you’ll rarely encounter such a loss. I have done so three times in my entire investment career, and I must have bought and sold hundreds of different shares. (One of them, by the way, was a case of financial fraud, and I had no way of detecting it; the others were in video games and mining, two sectors that are full of traps, but I blame myself for not taking an exit much earlier. I could have done so, but hung on in a classic example of what Peter Lynch calls “watering the weeds”—see below.)

For example, let’s consider a potential recovery stock, Anheuser-Busch (BUD). It’s one of the world’s largest brewers, with operations in the US, South America, Europe, Asia, and Africa. The company was hit by the coronavirus crisis as bars and restaurants closed—though of course some customers ordered beer to drink at home, so things weren’t by any means as bad as they were for the hotel and airline sectors. Should I buy BUD now?

April volumes were down 32 percent, so we can probably guess that in the near term revenues will be hit by about a third. However, that does seem to be the worst impact, and while those sales won’t come back—no one’s going to hold a St Patrick’s parade in October—it’s likely that recovery will be reasonably rapid.

Anheuser-Busch hasn’t been the best investment in the sector. Shares had already slipped from over $120 in 2017 to around $70 in early 2020, reflecting the fact that craft beer was taking a bigger share of the market from mainstream beers like Budweiser and Stella Artois. The company had also cut marketing spending, which puts earnings up short-term but isn’t always a good idea long-term.

However, the health crisis pushed the shares down as low as thirty-five dollars in March 2020, an all-time low. They’ve bounced a bit; now in (summer 2020) they’re trading around fifty-five dollars. Should I buy?

The potential upside is, I think, recovery close to 2021’s original estimates as long as there’s not a second wave of coronavirus. This year’s earnings could be anything—but I think the market doesn’t care about 2020 any more. The company has bought into

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