What is RISK when it comes to investing?

What is "risk"?

"In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity. Where else do you look for cheap stocks"? Li Lu
 

When I was in school, I was taught risk is the VOLATILITY of an investment. Or, how much it goes up and down in price. But if you think about it, the act of JUMPING up and down on the street is not necessarily risky. It is risky if you deliberately jump near a hole and break a leg!
 

So a more accurate definition of risk would be "a permanent loss of capital". This is where a stock drops in price because its fundamentals have deteriorated.
 

Where it gets tricky is this. Assessing the risk, or potential for a permanent loss of capital is very subjective. Unlike what academics call "beta", it does not produce a specific number that can be used in a formula!
 

You actually need to analyse the company's fundamentals carefully to determine its risks and this would include looking at its balance sheet, how much liquidity it has, how profitable the company etc etc.
 

So the next time you see volatility in the stock market, think of it as a necessary part of investing, the "ticket" if you will, to potentially getting a good price. It is certainly not "risk" to me.
 

Just don't jump too close to a hole eh?