13 Risky Thoughts on Investing

“There are old investors, and there are bold investors, but there are no old bold investors” – 13 Risky Thoughts on Investing

In this piece, I am taking the risk of not presenting any original or unique thoughts, as I have read so many wise texts on the subject over the years written by people far more insightful than myself. To the extent my writing skills allow, I will try to bring Proprius Partners’ thinking on risk into the text and also use Finnish listed companies as examples.

For those seriously interested in investing and in the wisdom related to risk, I recommend reading the memos of Howard Marks, founder of Oaktree Capital Management. Over the years, he has written several classics. I would argue that, taken as a whole, Howard Marks’ writings are even better and more educational than Warren Buffett’s annual letters.

What follows are my 13 miscellaneous thoughts on risk — and most of them have, over the years, consciously or unconsciously, been borrowed from people wiser than me, such as Howard Marks, Charlie Munger, Peter Lynch, George Soros or Warren Buffett.

1. The Risk of Getting Stuck on the Sidelines

“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” -Peter Lynch

There are many people, including in my own circles, who believe everything is always going badly and that the world is on the verge of collapse. That may very well be true. In some respects, I admit I belong to that group myself.

Still, history suggests that it has paid to remain invested in equities over the long term. The surest way to lose purchasing power is to keep money under the mattress, where inflation can punish it.

Figure 1. Returns of asset classes over a very long time horizon.
Source: Jeremy Siegel, Stocks for the Long Run; edited by Proprius Partners.

The main way to avoid getting stuck on the sidelines is to invest. Keeping time diversification and asset class diversification in mind already gets you a long way — at least if you do not try to be a hero and take overly aggressive views. At Proprius, we regularly remind one another of one of our values: humility. It is highly recommended in the investment world, also from a risk perspective. And, of course, in life more broadly.

Even by saving modestly, far more people than today would have excellent conditions for building wealth over decades, even if the initial savings amount feels insignificant. But I have not decided to make this my life’s mission, so frankly, I do not really care whether someone wants to become wealthier or not. In my view, not investing would be truly risky, provided investing is done in a way suitable for the individual. In other words, having a bird in the hand is fine, but it would be good to have a few in the bush as well.

2. Volatility as a Measure of Risk

“Theory accepts volatility as the indicator of risk, because data on volatility is quantifiable and machinable. But people in the real world don’t worry about volatility or demand a premium return to bear it; what they care about is the likelihood of losing money. Because that likelihood can’t be quantified, risk is best handled by experienced experts applying subjective, qualitative judgement that is superior.“

-Howard Marks

At Proprius Partners, we do not place much importance on volatility as a metric. If, for example, Sampo’s share price falls sharply amid general market turbulence and the stock’s volatility therefore rises, in our view the risk level of Sampo’s shares has fallen rather than increased for a long-term investor.

To be completely honest, I have not once during my time at Proprius Partners checked the volatility figure of an individual stock before making a purchase or sale. Not our thing. Of course, we have some kind of intuitive sense of whether Incap’s share is riskier than Kesko’s when measured by volatility, but we certainly do not base our decisions on such figures. We focus more on the company’s business outlook and business risk than on the mathematical riskiness of the share price movements.

3. Valuation Risk

“High valuations entail high risks.” -Benjamin Graham

As many of our readers know, we portfolio managers at Proprius have a background in value investing. In our view, the price paid for a stock — valuation multiples — always matters, especially for a long-term investor. This differs from short-term speculation, where it may be completely irrelevant what one pays for a stock if the intention is to sell it to the next investor, for example, a minute or a day later.

Figure 2 below serves as a reminder of the clear correlation observed in the United States between the starting valuation paid for equities and the following 10-year returns, based on data from 1988–2014 by J.P. Morgan. In other words, anyone currently forcing money into US equities could at least pause for a moment and look at this chart, asking why this time, once again, everything is different. Let us also once more highlight my colleague Johan Elfvengren’s excellent piece from late November 2024: This Time Is Different… Again.

Figure 2. Forward P/E ratio of the S&P 500 Index and the following 10-year return.
Source: J.P. Morgan Asset Management / Howard Marks’ memo “On Bubble Watch”, January 2025.

One of Mark Twain’s famous sayings is: “History doesn’t repeat itself, but it often rhymes.” Few investors are likely excited about annual returns hovering around zero for a decade; faith in a much better outcome is clearly in the air. It will be interesting to see what the situation looks like at the beginning of 2035. Will US equities still have been the overwhelmingly best place to be? If I had to guess, I would say no.

On the other hand, one could also argue that US equities’ returns on capital and growth prospects, driven by technology, are clearly better than elsewhere in the world, and that the higher starting valuation is therefore fully justifiable. What we can say with certainty is that risk will be present in this 10-year period as well — whatever happens. Few have the nerve to be completely out of the US market.

4. Business Risk and the Risk of a Wide Range of Outcomes

“There’s a big difference between probability and outcome. Probable things fail to happen – and improbable things happen – all the time.” -Howard Marks

Marks is well known for illustrating the relationship between risk and return with the chart shown in Figure 3. It shows very well that as the level of risk increases, the range of possible outcomes — both upside and downside — typically also widens. For example, the expected return of a moderate-risk fixed income fund is much more tightly constrained than the return range of a complex, high-risk leveraged fund.

Figure 3.
Source: Oaktree Capital Management.

If one applies Marks’ chart to the Helsinki Stock Exchange, the companies in Figure 4 could be used as examples. These companies were simply the first to come to mind, so this is not exactly a scientific approach. The idea should nevertheless be clear.

Figure 4. Example applied to the Helsinki Stock Exchange.
Edited by Proprius Partners.

If the time horizon is medium term — for example 3–5 years, since over a sufficiently long time horizon practically all companies go bankrupt — Elisa’s business risk is low, and therefore the risks related to its share are moderate, all else equal. UPM, as a cyclical company, although a good operator in its sector with a strong balance sheet, has fundamentally more potential to surprise either positively or negatively.

Talenom, which operates in the accounting services sector, faces additional threats and opportunities due to its smaller size. The sector itself includes many defensive elements, but Talenom has major international ambitions, particularly in Sweden and Spain, but also in Italy. It also has a reasonable amount of debt, and growth through acquisitions is risky business. In recent years, the tension in the share has mainly been released downwards, but could the risk level now be more moderate for new investors?

Drug development company Faron is one of the most highly wound springs in Helsinki. The share could multiply if the company succeeds, but it is also easy to imagine the share going to zero. Some investors may be excited by this kind of asymmetric risk, while others will say that under no circumstances do they want to sacrifice even a small share of their capital to such a risky case. In 2024, for example, the company issued a release whose English version included the word “default”.

Of the companies mentioned above, Proprius Partners’ Micro Finland and Arvo Suomi funds held Elisa, UPM and Talenom at the time of writing.

5. Liquidity Risk

“No investment vehicle should offer more liquidity than is afforded by the underlying assets.” -Howard Marks

A rather timely quote from Marks, considering the discussion around real estate funds that has flared up in the Finnish media in recent weeks. As most of our readers know, one segment that has been particularly attractive for asset managers and has risen to its current prominence over the past 15 years or so, lubricated by the zero-interest-rate era, is private funds. These funds focus on assets outside listed markets, and investors’ capital is often locked up for up to 10 years.

This provides good working conditions — and substantial fees — for asset managers, but in cases where investors change their minds, the solutions are not always optimal. On the other hand, in some scenarios it may actually be in the interest of a panicking client that they cannot even theoretically exit such an investment solution in the heat of emotion. Listed equities, after all, can be dumped for sale for as long as the price is not zero.

In the example of real estate funds, Marks’ quote is particularly apt in the current situation, because these funds have offered, with some variation, certain redemption possibilities — until now, when redemptions have become so large that the underlying market, namely the properties, cannot keep up. Liquidity is insufficient. This is an unpleasant liquidity mismatch.

At Proprius Partners, the liquidity position of the funds is monitored regularly, and the fund rules have been structured so that portfolio managers have sufficient time to cover potential redemptions even in very negative scenarios. The non-UCITS fund status is a positive factor from the perspective of both portfolio management and clients. Small-cap funds are fundamentally less liquid than funds investing in larger companies. Some Proprius funds invest the majority of their assets in large-company shares, but especially in small-cap funds, we most often maintain a modest cash buffer in order to avoid unnecessary sales as much as possible if a client wants to redeem capital from the fund.

Assessing liquidity is also an essential part of company analysis: does the company have financial flexibility or not?

”It’s very hard to go bankrupt when you don’t have any debt.”

-Peter Lynch

The same naturally applies in practice to individuals as well. It is sensible to have a buffer for truly unpleasant situations — or, in the case of the stock market, for buying shares when they sometimes dip. A stock market dip is not an unpleasant situation, but the best time for net buyers of equities.

6. Examples of Behavioural Risks

a. Overconfidence Bias

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” -Mark Twain

Twain’s wisdom is second to none. Inexperienced investors are often very confident in their abilities. On very thin grounds, they may take remarkably large risks and hope for the best. Of course, one is allowed to do that, and some have succeeded that way, but most often it eventually ends badly. It would be extremely important to be able to admit to oneself what one actually knows about something — or whether one knows anything at all — and what could go wrong and lead to a serious setback.

Most people learn once overconfidence has punched them hard enough in the face, but some never do. The English quote in the title of this blog — “There are old investors, and there are bold investors, but there are no old bold investors” — is also from Marks and resonates excellently with overconfidence bias.

Perhaps I am myself falling into overconfidence bias by writing this, but as I understand it, both men and women have a good chance of falling into this trap, although statistically men excel at it even more than women. Jasmin Schiel, in turn, writes in her study: “The data suggests that women are more risk-averse when it comes to estimating one’s skills. In surprising contrast to that, the women who did show boldness in decision-making tended to overestimate their skills way more than their male counterparts.”

Source: Overconfidence Bias and the Gender Effect. Is there more than just gender? Faculty of Economics, Management and Accountancy at the University of Malta, 2023.

b. Confirmation Bias

“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.” -George Soros

People like being right. Know-it-alls especially so. George Soros is known for his ability to size his investments meaningfully when he believes the probabilities are strongly in his favour, but he is also known for the noble art of changing his mind. His ego does not collapse even if he is badly wrong. He does not seek views that confirm his own opinion — rather the opposite.

“When the facts change, I change my mind – what do you do, sir?” -John Maynard Keynes

Keynes’ wisdom strikes at the heart of confirmation bias. When the facts change, one should be able to change one’s mind — for example, sell a company’s shares even if it feels painful — instead of hoping for a miraculous turnaround, and especially instead of looking only for data points that support one’s own, probably badly wrong, view.

Confirmation bias is also fuelled by like-minded people, who may be found among friends, colleagues, social media, discussion forums and many unpredictable sources. Meme stocks are one example, with their rises fuelled on discussion boards and social media. The role of contacts and networks as sources of ideas should not be underestimated, but they can also feed a certain kind of bubble-living and therefore confirmation bias.

7. Concentration Risk

“Risk means more things can happen than will happen.” -Howard Marks

If one concentrates investments too much, one can eventually end up in trouble. Concentration can take many forms: investing in one country’s equity market, one or a few companies, one asset class such as equities, and so on.

Unpredictable things happen constantly, and if something unpredictable happens to an investment to which an investor’s portfolio is significantly exposed, the damage can be devastating. There are so many crisis-hit companies that there is no point listing them here, but for example German payments technology company Wirecard was once a company with a market capitalisation of around EUR 20 billion before it ultimately turned out to be a house of cards and the share went to zero. Enron in the United States was in the same category in the early 2000s. Among small companies, total blow-ups happen much more often. One reason is that smaller companies’ businesses often rest on narrower shoulders and their financial resources are more limited.

In recent years, the Helsinki Stock Exchange has unfortunately also served as an example of concentration risk. Those whose money has been entirely tied up in Helsinki-listed equities have been left standing still while other markets have rallied strongly. Proprius Partners’ Finnish funds have not escaped this either. Russia as our neighbour still does not exactly inspire all foreign investors to increase their exposure to Finland.

One can also concentrate by investment style. For example, small caps have developed very weakly in recent years relative to large caps. Investing only in small companies could have produced rather ugly results. See Figure 5 below.

Figure 5. Performance of small and mid-sized company shares relative to large company shares in Europe.
Source: Kepler Cheuvreux.

One can also mess things up by concentrating investments too heavily in a single sector that, for one reason or another, happens to perform particularly poorly. The video game industry, for example, has had a difficult time on average after the COVID bubble burst, including Remedy in Finland and Embracer in Sweden. Renewable energy has also taken a very severe hit, even though the sector’s outlook was supposed to be almost immeasurably good for decades to come, including Neste in Finland and Vestas in Denmark.

8. Inability to Change as a Risk

“More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason.” -Philip Fisher

A good investor is like a chameleon, able to adapt to changing circumstances when needed. This is not easy, however, because it is often only in hindsight that it becomes clear what kind of change would have been needed. Each investor also has what they consider to be their own areas of strength where they would like to operate.

Probably the most legendary style shift is Warren Buffett’s own transformation. As a result of the late Charlie Munger’s brainwashing, Buffett eventually changed from a cigar-butt value investor into an investor placing greater emphasis on business quality. This was also influenced by the fact that one limitation of Buffett’s earlier, relatively deep-value-oriented investment style is that it is particularly challenging to execute with large amounts of capital. In such a strategy, buy and hold does not exactly work, so at some point one must also be able to sell the stock — and with large capital, that is not easy, as liquidity is insufficient. One can sometimes make money speculating in Finnair, but the sector and company fundamentals are weak, and creating shareholder value in a lasting way is extremely difficult.

“The biggest risk is not taking any risk… In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” -Mark Zuckerberg

There are many views one can have about Meta Platforms’ Zuckerberg, but at least he has managed to develop the company astonishingly well despite a few failures. He has specifically been able to change course, even after investing billions into something that ultimately did not appear to lead to the desired outcome. Finnish forest companies have managed to adapt well, while Nokia’s transformation was incomplete and the share has completely collapsed compared with the good old days.

9. Constantly Changing the Investment Horizon

“The big money is not in the buying and selling, but in the waiting.” -Charlie Munger

Patience is a virtue in investing too. The biggest money can only be made when one has enough sitting muscles to wait for an investment to appreciate in value through uncertain moments. Of course, one also has to be right, because sitting on the wrong investment is unlikely to produce remarkable results.

Especially in shaky times, many investors may panic and abandon even their best-performing stocks because the fear of losing the gains still visible in Excel becomes too great. The time horizon of investments intended to be long term suddenly becomes remarkably short. This is very human. When this is then often combined with paying capital gains taxes and investing in lower-quality companies, it is like cutting the flowers and watering the weeds. I have fallen into this trap many times myself, both as a private investor and as a portfolio manager.

Somewhat exaggerated, one could phrase it as in Figure 6, as private investor Brian Feroldi once tweeted.

Figure 6. It is important not to sell shares in excellent companies.
Source: Brian Feroldi’s Twitter.

10. The Investor as Their Own Greatest Risk

“The investor’s chief problem – an even his worst enemy – is likely to be himself.” -Benjamin Graham

Kuva 7. AI-generated investors looking in the mirror, perhaps to find the culprit behind their losses.

Emotions can easily take control in the investment world, so it is very important to know oneself as an investor. One can only get to know one’s investment self by practising investing and living through different stages of the cycle. And by making mistakes that feel horrifying. One might imagine that reading a couple of books or blogs would be enough, but I have yet to meet such an investor.

Figure 8. The Cycle of Market Emotion.
Source: onedayinjuly.com.

Marko Erola’s book Paras sijoitus includes a similar chart illustrating the emotional cycle of an index investor — the kind of situation most of us would do well to reach.

Figure 9. The emotional cycle of an index investor.
Source: Proprius Partners and onedayinjuly.com; idea from Marko Erola’s book Paras sijoitus.

In short, to end with Ben Graham: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

11. The Risk of Buying in Heat

“When something is on the pedestal of popularity, the risk of a decline is high.” -Howard Marks

Who still remembers the carnival atmosphere of 2021? Back then, excellent opportunities were offered to buy shares at significant overprices. Particularly in smaller companies and “quality companies”, there were in places very strong bubbles, which have since burst violently. Severe excesses were seen in companies such as QT, Revenio, Talenom, Remedy, Admicom and Harvia. Later, Kempower, for example, generated hype and its share became badly inflated in 2023. In situations like these, a decline of 60–80% is no great feat. Of course, these are clearly easy to list afterwards like yesterday’s weather, but the common factor among the companies above was the strong popularity that Marks refers to. Operationally, many of the companies mentioned have performed well or even very well. Mainly Talenom and especially Kempower have stumbled operationally relative to the expectations that prevailed at the time.

The companies mentioned above are small or relatively small in business terms, but large companies can also go too far. For example, Kone was very highly valued in 2020 and 2021, even though China had empty apartments to house 90 million people, according to The Financial Times, and everyone knew that China was by far the most significant driver of Kone’s share and that the growth spurt in China’s new equipment market was largely over. Of course, at that point Kone had delivered first-class performance for about 15 years, so recalibrating expectations can take some time for anyone in such a situation.

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” -Warren Buffett

Following Buffett’s wisdom above, there is currently not much interest in the Helsinki Stock Exchange, after shares have declined for about three consecutive years. Could now finally be the time to turn attention properly back to the domestic market? There is little enthusiasm in most companies, which is generally a good thing for those currently considering buying shares.

12. The Risk of Losing Capital — Badly

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” -Warren Buffett.

Many people think risk in investing is above all about permanently burning capital. In practice, this means taking a 90–100% hit, from which recovery is almost impossible through traditional means. There are many ways to end up with this feared outcome, and most often at least one of the risks mentioned earlier is involved in some way. At portfolio level, excessive concentration in a rotten investment is probably the most likely reason — and if one happens to be playing with borrowed money, then…

“One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital.”
— Warren Buffett, Berkshire Hathaway annual letter, 2023

Anyone who has ever seen their portfolio properly burn knows that climbing back to the starting level can require a great deal of work and pain. Buffett’s wisdom is therefore worth keeping in mind. It is nevertheless inevitable that individual investments will occasionally take hits, so the rule should not be read too literally. Buffett also makes losing investments.

13. Ignorance as a Source of Risk

“Risk comes from not knowing what you’re doing.” -Warren Buffett

One of the easiest ways to achieve significantly negative results is to operate with investment instruments that one does not understand at all. The same can apply to leveraged contraptions, individual shares and, in practice, every possible asset class and investment product.

If one absolutely must start playing around, then it should probably be done with such a small share of total investable wealth that even the weakest outcome does not sink the whole boat. The first thing that comes to mind is a certain Mermaid bond issue from about 20 years ago, which was discussed in the Finnish media at length and in great detail. If an investor has their own “circle of competence”, it is generally wise to stay roughly within it — although it is certainly not illegal to gradually try to expand one’s area of expertise.

All of us investors have taken hits from time to time, and we will continue to do so even if we would rather not. Howard Marks’ following quote summarises the situation well: “Experience is what you got when you didn’t get what you wanted.” Our task is to extract every possible lesson from these experiences, because otherwise we do not really develop as investors.

Inspired by Marks’ latest memo, I will end my risk piece as follows:

“I always say the riskiest thing in the world is the belief that there’s no risk.”

Let us try to remain appropriately cautious also in 2025.