“Risk means more things can happen than will happen.” Elroy Dimson

One of the most important lessons that I had early on in my investing experience is that it is more productive and profitable to think in probabilities, rather than absolutes. Unfortunately, it is a lesson that I sometimes need to re-learn. What I mean by that is thinking through the buying decision not as “is this stock definitely undervalued?” or “is this stock going to double?”, but rather as “is it more likely than not to be undervalued?” or “is the business more likely to be better in the future than it is now?” It is a subtle difference, but it re-focused my emphasis on not just the upside potential, but on the downside risk. Continue reading →