risk
Price Is the Risk
The rule
The risk sits in the price you pay, and it feels smallest exactly when it is largest. The stock feels safest right after it has tripled.
Where it flips
Pushed too far, 'high price equals risk' makes you refuse every good company forever and sit only in cheap junk. The fix is to weigh the price against what the business is truly worth, not to treat a low number as automatically safe.
A wonderful company can be a bad investment if you overpay, and a dull one can be a fine investment if it is cheap enough. The danger is that after a share has tripled and everyone feels comfy, it seems safe, yet that comfort is exactly when you pay the most for the least. Real safety usually feels uncomfortable, because you are buying when the price, and the mood, are low.
A worked example
Arjun buys a popular stock at ₹900 because 'it only goes up'. The same share at ₹300 a year earlier felt too scary to touch. He paid the highest price at the moment that felt the safest. [illustrative]
How to spot it
- ·'It's safe because it keeps rising'
- ·Buying only after a big run-up
- ·No one asks what the business is truly worth
Howard Marks · The Most Important Thing