There are people who understand risk and there are those who understand returns, but very few investors understand the combined implications of risk-return.
During financial literacy courses we conduct with some corporates, a lot of people tell us that they don’t want to take risk, and that risk only means loss. These are the extra conservatives who are driven solely by risk aversion. They want the safety of gold, real estate or a nice Fixed Deposit. They’re happier if the FD will give higher yields, oblivious to the reason why the FD yields of SBI are much lower than PMC bank. So they are ultra-risk averse, but they will be enchanted to higher returns as long as the perception of said returns looks risk-free. In India, an FD, or real estate investments have conventionally meant to be virtually risk-free. But this reality is being rapidly challenged, with banks going bust along with people’s deposits, real estate companies unable to complete projects, and a huge amount of unsold inventory accumulating in India’s major cities.
During our options trading courses on the other hand, we occasionally get to encounter the daredevil spirited trader. This person only cares about doubling his investment as soon as possible, and is seeking for the best way to do so. Despite numerous failures, and past losses, he’s still going strong, and firmly believes that he has almost cracked the code of the markets. He makes several intra day trades, purely based on a chart movement, or a tip given on whatsapp. With such an approach, this person has a 50% probability of winning and the same as losing. It is almost a pure game of chance, and if lady Fortuna is on his side, he makes his buck, else the stop loss gets triggered. This kind of trader takes heavily leveraged bets (leverage is the ability to amplify your investment using a smaller capital) and has no sense of what risk he’s taking. He’s solely driven by returns (but he too secretly wants to make big money with least risk).
However, these two diametrically opposite worlds seem to do a time-space warp during extremely volatile times. When the NIFTY came tumbling down 6% on 9th March 2020, and crude crashed 30%, I witnessed the most interesting phenomenon. My ultra risk-taker friend found it too risky for his appetite, decided to call it quits. He took all his money out from his demat account and invested in a debt fund. He tells me that he wants to wait this extreme volatility out, and he will be back in the game when markets settle.
On the very same evening, an even more peculiar thing happened. I received a phone call from my extra conservative investor friend. She said that she wants to invest 30% of her savings in one particular stock. Completely baffled and highly curious, I asked her which stock she wants to pick for this purpose. “Yes Bank” she claimed! Apparently, a friend of hers had invested a large sum of money at just Rs. 8 per share and on the same trade day, the share jumped to 18! Enamoured by such a profit and such a cheap share, she was convinced to invest 30% of her assets on yes bank. Not invest, but gamble!
Volatility can do tricky things. It can turn a lion into a cat, and a cat into a lion!