Sat Apr 5th, 2008 at 05:49:49 PM EST
In a probably futile effort to make myself less unemployable, I'm reading Fabozzi's Bond Markets, Analysis, and Strategies. In it, there's the following list of sources of risk for bond holders:
Bonds may expose an investor to one or more of the following risks: (1) interest-rate risk, (2) reinvestment risk, (3) call risk, (4) credit risk, (5) inflation risk, (6) exchange-rate risk, (7) liquidity risk, (8) volatility risk, and (9) risk risk.
Risk risk? WTF is that? A typo?
There have been new and innovative structures introduced into the bond market. Unfortunately, the risk/return characteristics of these securities are not always understood by money managers. Risk risk is defined as not knowing what the risk of a security is. When financial calamities are reported in the press, it is not uncommon to hear a money manager or a board member of the affected organization say "we didn't know this could happen". Although a money manager or a board member may not be able to predict the future, there is no reason why the potential outcome of an investment or investment strategy is not known in advance.
There are two ways to mitigate or eliminate risk risk. The first approach is to keep up with the literature on the state-of-the-art methodologies for analyzing securities. Your reading this book is a step in that direction. The second approach is to avoid securities that are not clearly understood. Unfortunately, it is investments in more complex securities that offer opportunities for return enhancement. This brings us back to the first approach.