Emphasize 'Bad' Risk When Investing

If you are looking at the U.S. markets, you may believe that since early March investors are waking up and pouring themselves bowls of "Risk Crispies" for breakfast -- if only Kellogg (K) made these too.

The stocks that have been rallying the hardest are the ones that have been sold down sometimes more than 90% in the past two years. Now, do note that I'm not here to recommend what I consider to be highly speculative plays, like snap, General Motors (GM), crackle or pop, Ambac Financial (ABK). Actually, I wrote this piece before I knew GM was becoming "Government Motors." I've been thinking of GM as the Titanic. Nobody wanted it to sink, but the ship was structured with too much optimism and it looks to be taking all the shareholders down to Davy Jones' locker.

What I will say is that I believe the more you pay for the stake in a business the less likely it becomes that you will be able to sell it to someone else at a higher price. In the land of investing, risk comes from overpaying -- the winner's curse. I would say that it is certainly less risky to pay less for something if your objective is to make money by selling it off at a later date.

The way I see it, there are two kinds of risk in the stock market. There's "good" risk and there's "bad" risk. More emphasis should be placed on the bad kind of risk because by being able to avoid it investors can outperform the market in the long run --- which is what most of us are interested in. Most bad risks come from people that don't understand what they are doing.

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