In every investment, there are risks involved. But in some, the risks are more.
In our last column, we saw the difference between “savings” and “investments”. In this column, let us see how risk varies from investment to investment. Once again, let us use the analogy of cricket to understand this.
Let us take the case of two top Indian batsmen whose games are as different as chalk from cheese. Any guess as to who these two might be? Let us say the first one is Virender Sehwag. And the other is Rahul Dravid.
When you think of these two players, what comes to your mind? What do you associate with Sehwag and what do you associate with Dravid? And for the statistically oriented, how different are the batting averages of these two batsmen?
When we think of Sehwag, we think of high risks and also fast scores. And also the occasional triple hundreds! But there is one word that you would not associate with Sehwag. Reliability. With him at the crease, you do not know what is going to happen next. The ball could be smacked for a six or he could get out playing an outrageous shot. On the other hand, what comes to your mind, when you think of Rahul Dravid. Stable, technically sound, dependable. So, we have these extreme perceptions regarding these two excellent batsmen. Some may prefer the excitement of Sehwag and some others may prefer the stability of Rahul Dravid.
So much for perceptions. Let us now look at their career batting averages in tests to see if the statistics tell us something different from our perceptions. Rahul Dravid averages a very healthy average of 52.30 per completed test innings. You expect nothing less from “the Wall”. Let us take the case of the swashbuckling Sehwag. Surprise, surprise, he averages an equally healthy average of 50.80 runs, which is even more remarkable given that he is an opener. If the averages are telling a completely different story compared to our perceptions, how do we reconcile these seemingly conflicting pieces of information? It cannot be denied that Sehwag's play is riskier than Dravid's. Yet, his returns (career test average) are not very different from Dravid.
If we are to see Sehwag and Dravid as investments, we would like to think that the returns from these investments are identical, but the risks are rather different. Investment Sehwag is riskier than Investment Dravid. Is there a way we can explain this difference in risk in a better manner?
Let us see the answer to that in our next column.
Money Trivia :
The Rupee abroad
Do you know that previously the Indian currency was the official currency of several countries? Yes, countries like Aden, Oman, Kuwait, Bahrain, Qatar, Kenya, Seychelles and Mauritius were using the Indian Rupee as their official currency.
Young World Money-Wizards Quiz #15
This month, we really have a simple quiz. Name the country whose currency can be issued by Bank of China? What is this currency called?
If you know the answer, email your answers to email@example.com. The first five correct answers within seven days will each be awarded flipkart e-vouchers worth Rs. 250. The results and the answers will be published at www.money-wizards.com.
About Money-Wizards: A company in financial literacy and money education. They conduct workshops and after-school classes on money education for school children. If you want Money Wizards programmes in your school or neighbourhood, write to Info@Money-Wizards.com