Philosophy of Investment------Arts of Subsistence

The advantage of a fund is not reflected primarily on the selection of certain stock or get into the market at certain period of time, but the ability to consistently control the risk. Quantifying the degree of risk is the criteria to measure the professionalism of a fund manager. In the investment circle, “to survive” is always the first. But for the professional investor, discussing about the risk estimate by itself is usually meaningless.

The core of investment is to confirm the symmetry of risk and return. Any kind of risky assets can be invested and compensate with enough yield return. The core goal of investing research is to look for the symmetry between risk and yields, around which, it can be extended to all assets class stock and security pricing, pricing of insurance products, pricing of mortgage bond and pricing of derivatives like futures and options, etc.

The main aims of professional investment is to look for divergence between the level of risk and return. When the asymmetric pricing relations between risks and return reach our investment target range, opportunities do exist for us to gain the profit far exceeding the average return of the market.

The simplest application of this theory can be illustrated with selecting growth stocks that are traded at lower than the average P/E multiple —thus minimizing the risk of a trading position. Of course, as a fund or a professional investor, we need to consider from a broader picture

1. Is current level of market P/E ratio rational ?

2. Is the P/E ratio level of the stocks compare to overall sector rational ?

3. Is the P/E ratio enough to compensate for the inner risk of the company?

4. Is there a better method for risk—yield measurement?