Narach Investment

RISK CONTROL AND INVESTMENT CAPITAL MANAGEMENT


Most would believe that buying and selling of stocks and other financial instruments would qualify as investment, and it would be so upto a certain point in the investment management process. However, for an investor to implement a successful investment program it would be imperative for him to consider this matter of investment from the point of view of both risk control and investment capital management.

As far as risk is concerned, it would be inherent in all financial instruments were there is an expectation of a higher rate of return when compared with the rate of inflation. The exercise would revolve around implementation of risk control tools to minimize this risk upto a point where the expected rate of return is not compromised. In a sense it would be balancing act on the part of the investor.

Tactically the risk control measures would require discipline with regard to ensuring that the transaction size is reduced to a reasonable size to eliminate the risk of a wipe out of the investment capital over the span of a series of transactions that may go wrong. That the expected rate of return with regard to the transaction being known, the investor would liquidate the stock position held when the return (or profit) rate (or target) has been achieved. Taking appropriate action prior to major news events and information flow which may have a direct bearing on the systemic risk associated with the stock market itself or non-systemic risk associated with a stock position the investor may be holding in his portfolio.

Strategically risk control would require the investor to always have a fair margin of safety under the belt while engaging stock positions and/or derivatives thereof. This would be applicable to both value based investing as well as growth based investing. This would also reinforce the old adage that all stocks are good at a certain price. Further, the investor would also be required to ensure that at the point of engaging (or buying) a stock position or part thereof, there is limited downside while the upside while enabling a reasonable return has a higher propensity of occurring.

These risk control measures would flow directly into the investment capital management area of investment management; and would indeed be of more importance to the investor than analysis itself.

As far as investment capital management is concerned it would be amongst the primary objectives of the investor to ensure that there is always money available in his investment capital account. To further ensure that this would be the case exiting a stock position profitable would be of more importance when compared with engaging or purchasing it. Further, that the position size is kept at a level which is easier to manage when matters do not proceed as expected and there may be a situation of an impending loss in the short term.

Investment capital management would also ensure that the investor would monitor his stock positions; and take appropriate steps and decisions on the buy side as well as on the sell side, when signals (both fundamental and technical) are visible. Ideally, an adherence to such processes would ensure discipline in transactions and the minimization of the influences of emotions which in any case have very little to do with the performance of the stock position to be engaged, held or subsequently sold.

It would be the utilization and application of risk control tools and investment capital management processes in concert which would ensure the long term and profitable survival of the investor in the investment environment. Although, the views expressed above are relevant to stocks purchased in the cash market; they would also be applicable to the futures and options segment of the equity markets and other markets including but not limited to the commodities markets and forex markets; as the underlying objective would be a profitable conclusion of transactions in favour of the investor (whether institutional or retail or a corporate entity between the two).