“For much of recorded time, events with negative consequences were attributed to divine providence or to the supernatural. The responses to risk under these circumstances were prayer, sacrifice (often of innocents) and an acceptance of whatever fate meted out. If the Gods intervened on our behalf, we got positive outcomes and if they did not, we suffered; sacrifice, on the other hand, appeased the spirits that caused bad outcomes. No measure of risk was therefore considered necessary because everything that happened was predestined and driven by forces outside our control. ”
Aswath Damodaran, Stern School of Business, NYU
Luckily, we no longer look at risk with such apathy. Risk is anything that cause the stock price to move in the opposite direction you (think,want,hope) it will move and can be broken down into various forms: corporate risks, systemic/mechanical risks and tail-event risks (acts of God) and execution risk.
Forms of corporate risk:
- Competition
- Insiders are idiots, delusional, greedy
- Management are crooks, accounting shenanigans, dilution
Forms of systemic risk:
- Market risk, i.e. herd effect.
- Macroeconomic risks, Interest Rate Risk, Inflation Risk,Exchange Rate Risk
- Third-party price manipulation
- Investor competition, general stupidity.
- Disingenuous information chains
Examples of a tail-event risk:
- Godzilla
- COVID
- Death of the President
Examples of execution risk:
- Investor anxiety
- Lack of due diligence
- Impatience
- Impatience
- Impatience