Risk Is Path Dependent

Yesterday, I discussed how both laypeople and finance professionals assess the riskiness of an investment the same way. More importantly, changing the volatility of an investment didn’t change the belief of risk materially. What did influence the perception of risk was the skewness of an investment. Investments with positive skewness, i.e. payoffs just like a lottery with many small deficits and large benefits potentially, are regarded as less risky than investment with negative skewness.

This finding fits nicely with one of the most crucial features of risk that is often overlooked by investment professionals: our notion of risk depends on the circumstances. Take a look at the chart below. It shows the introduction of two investments over one year. Both investments have the same return and the same volatility, but one investment (the dark blue line) has negative skewness while the other (light blue) has positive skewness.

  • 5 x 2.5 ie 18.75
  • It is registered with SEBI
  • Margin trading increases your degree of market risk
  • Commodities scams
  • Pay yourself first
  • Founders: Galit Laibow, Greg Fleishman, Sarah Michelle Gellar
  • Otherwise intervene to ensure that the bank’s capital levels are adequate
  • Go Digital

Thus, a financial adviser has to constantly force against a confluence of factors that reinforce one another and create a sense of urgency to act when confronted with a short-term downturn. This is what buyer education should concentrate on, in my own view. The tools that achieve these goals are varied. Visualisations of hypothetical or historical episodes in financial marketplaces that can be talked about to make traders alert to path-dependency are a good starting place. Putting short-term shows in financial markets into a long-term context, constant with the traders time horizon is another important tool.

Do EGM products have lower gross margins? Gross margins are down a little but, however, not really very much. But it appears like technology and content cost has been trending up too. So even if some of these things are one time factors, it seems over the board. The big thing, though, is the claim that AMZN is buying market volume and share with free shipping and delivery, Amazon Prime and things like that. Below is the table of shipping revenues (shipping fees charged to customers) and shipping expense (what AMZN pays to provide products to customers). So that it seems that there surely is truth to AMZN’s buying of market share via free delivery.

This is big, since operating margins have only averaged 4.1% since 2003. Net shipping costs have increased 2.5% since 2003, so that by itself may account for a large area of the decline in working margins. So what do we’ve? We’ve increasing sales, but with declining margins, increasing world wide web shipping and other costs. Will AMZN have the ability to keep increasing sales and market share without increasing incentives like subsidized delivery? I have no idea. AMZN is gambling that customer loyalty due to these bonuses will allow these to make back profits later. Will AMZN be able to increase margins regress to something easier without reducing these incentives?

I suspect that with the Kindle, more and more of the fullfillment centers will be dealing with eletronics and other general products rather than books and CDs, which will migrate to the Kindle and other electronic distribution eventually. At that true point, will AMZN have a moat still? AMZN’s moat was it’s incredible distribution centers for books/CD’s.