Risk Factors Archives | Business Economics

Value Investing – Risk Aversion (Lesson 2)

Lessons/Tutorials/Resources / By David J Hoare MSA / 11/11/2020 01/04/2021

Value investing does require some volatility with the market in order to have opportunities to buy low and sell high. A static market, even one with level growth will not work with value investing. Fortunately, the market isn’t stable and volatility does exist. This volatility is driven by multiple forces: politics, interest rates, consumer patterns, environmental conditions and more. Thus, opportunity exists for value investors. However, value investors seek opportunity with minimum risk.

Investing in any financial instrument comes with risk. The absolute worse case is full economic chaos created by a meltdown of governmental authority. If this were to happen, it would not matter what kind of financial instrument an investor holds, all of them are worthless as you can’t eat paper. Some would say physical possession of gold is the only pure investment because it would be tradeable in case of world disaster. This would be true if there exists a government to enforce some resemblance of order allowing trade between producers and consumers.

Ignoring total breakdown, financial instruments do have a hierachy of risk associated with their potential to become worthless. Understanding risk aversion starts with understanding the spectrum of financial instruments and their inherent risk factors. In addition, this is further refined by size, i.e. market capitalization of the respective issuer of the financial instrument. Finally, risk aversion is also a function of the dynamic range of the respective company backing the financial instrument. The following sections provide this holistic thinking related to risk aversion, specifically as it relates to stock investments.

Profit Standards for Residential Contractors

Construction Industry Standards / By David J Hoare MSA / 08/01/2018 11/19/2020

Profit standards for residential contractors vary depending on the type of contractor. In general, the net profit standard for contractors in the upper tier of performance range from 5.8% to as high as 9.6% of sales.

Shareholder Dynamics in Small Business

Business Principles Start-Up / By David J Hoare MSA / 04/20/2015 11/22/2020

The majority of small businesses are owned by a single individual. An additional pool is family owned or controlled. The balance usually involves friends or relatives that are passive in ownership. These forms of ownership create some interesting shareholder dynamics and if not thought out, can create some legal and financial issues in small business when a life changing event occurs.

How Much is a Fair Profit? – Part IV of V Return on Capital

Business Principles Start-Up / By David J Hoare MSA / 12/30/2014 11/23/2020

For all investors in business, capital is the fronted equity an investor risks in exchange for a return. This return can range from zero to infinity depending on the success of the business. A fair profit is really a function of four different factors.

Vertical Integration in Business

Terminology / By David J Hoare MSA / 12/20/2014 11/23/2020

Vertical integration in business refers to the process of gaining control over more steps of the product production stream. Whenever a business obtains or can greatly influence any one of these steps along the process of producing and selling a product, it is referred to as vertical integration.

How Much is a Fair Profit? Part III of V – Risk

Business Principles Start-Up / By David J Hoare MSA / 03/31/2013 12/01/2020

A third factor in determining a fair profit percentage is risk. Risk is divided into two types. The first is insurable and the second is uninsurable risks. Insurable risks are mitigated and have very little to no effect on the profit formula due to transferring the risk to a third party known as the insurance underwriter. Uninsurable risks are non-transferable and therefore the profit must be adjusted to compensate for this type of risk.

Stability of Historical Earnings

Marginal Value / By David J Hoare MSA / 01/04/2013 12/04/2020

No other element of the Multiply Discretionary Income Formula has as much weighted value as the historical earnings of the company. Every knowledgeable business entrepreneur, accountant, lawyer, broker, you name them; they look for this information first. There’s a reason for this.

Risk Factors

Login