by Noriyuki Morimoto
Since risk is just a synonym of uncertainty, investment risk is, on the one hand, the possibility of loss, but on the other hand, it is the chance or opportunity to profit. In other words, investment is to take chances on the opportunity to profit as an intentional bet, and risk is an unintended factor that accompanies that bet.
In investment, risk as an intentionally taken chance is a positive one, i.e., a profit-making opportunity, where the intention is expected to actualize as profit; on the other hand, unintended risk that accompanies that intention is a negative factor that impedes and disturbs the intended outcome, and is subject to management or control.
In investment, there must be a distinction between risk that is intentionally taken and risk that is unintentional. For example, when investing in corporate bonds, one takes both interest rate risk and issuer credit risk, but it must be clear which is intentional and which is unintentional. If the investment opportunity is found in the analysis of the issuer’s credit risk, from which the investment is intended to create added value, then the interest rate risk should be managed or controlled and not considered as a source of added value.
The fact that the risk being managed is not a value-added source means that strict rules will be applied with respect to risk measurement indicators, even though there are a variety of different control techniques, such as minimization, control to a default value, or agreement with the market average.
In other words, since chance-taking is the creation of added value, and creation requires freedom and ingenuity according to the situation, there is no way that predetermined rules can be applied to it. By contrast, risk management is not about creating added value, but about purely actualizing the chance-taking action without disturbing it, so predetermined rules should be strictly applied.
[Category /Investment Philosophy]
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.