Chapter Summary
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Chapter Summary
Risk can cause harm or joy to people, depending on the level of winnings or losses. Winning is accompanied by losses since the human mind is encouraged to continue gaining, even when faced with losses. Historically, some great men had perfect runs in gaining despite the overwhelming odds, for example, Napoleon and Erwin Rommel. In the economic world today, many executive officers have displayed an exceptional run in gaining, during their first term in office. After a while, the short-lived success is replaced by a wave of losses, leading to their sacking. The replacement of personnel shows a cycle in the ignorance of risk. The main cause of risk in the investment world today is the volatility of the market.
The goal of the chapter is to educate people on the new measures to be taken to avoid risk when faced with changing circumstances. An analysis of the old measures reveals the damage caused to the economy in the past. A more detailed analysis shows how these damages could be avoided. Several problems are faced by investors, exposing them to risk. The major problem faced is the issue of liquidity. Lack of liquidity causes the downfall of markets that operate with products that are not easily convertible to money.
Another problem is the advantage gained by companies. Excess advantage should be avoided because of the difficulties in controlling it. The issue of inflation is another factor that exposes companies to risk. Inflation affects investments and savings negatively. This is because the rapid increment in market prices makes products unavailable to investors. The problem of taxation also exposes a company to risk. The analysis of T-bills, bonds and stocks after accounting for taxation and inflation, shows a massive drop in returns. A general example that combines the four problems is the fall of some American companies, which were exposed to risk during the late 20th century. This is because capital was not available to employ personnel, pay taxes, counter inflation and expand the business.
The chapter summarizes the various ways of avoiding and handling the issues that cause risk. The main approach used to avoid risks is to rely solely on predictions. Furthermore, investors should beware of offers and deals on products that are too sweet. Another way to avoid risk is through taking precautions when purchasing products in the market. Moreover, investors should stay clear of brokers in order to reduce expenses encountered. The final precaution is to avoid purchasing bonds whose interest rates are not clearly understood.
The chapter also describes the risks involved in purchasing stocks. The greatest fear by shareholders is the risk of a permanent shutdown by companies. This means that shareholders will not be compensated for the stocks owned. The major reason for companies going under is the rapid inflation beyond government control. In addition, the chapter describes ways in which risks can serve as advantages. This is achieved through demonstrations using T-bills, bonds and stocks. The tables are used to show the returns made by a company after inflation over a period of 30 years. The chapter also raises the questions related to the negative effects of risk. It is evident that the assumptions made by investors and companies put them at risk.
In conclusion, the chapter offers alternatives of measuring and analyzing risk. The most effective way of measuring risk is through improving the purchasing power by investors and companies. Two main considerations are made while attempting to increase capital by investors and companies. The key idea is to consider the amount of time taken by an investment to yield returns. Additionally, the chapter outlines two ways of analyzing risk. When the two methods are compared to stocks, a new approach to evaluating risks is seen through assessing an investment before allocating funds for its development.