Low Risk High Return

High Risk High Return

To understand "low risk high return" first we need to correct our understanding of the most misunderstood principle of investment and that is "high risk high return". I am not sure how many lives have been screwed because of misinterpretation of this basic principle, but I am sure it is a pretty high number and practically the single largest cause of all bad investment decisions.
So am I saying that "high risk high return" the term that all the qualified investment advisers of the world use to scam poor investors and sell them junk investment schemes, is completely wrong. No, but it needs to be understood in proper context.

What context?

Fixed deposits vs stocks

If you are comparing investment in stocks to investment in fixed deposits, then yes "high risk high return" is absolutely true. You can earn higher returns in stocks by taking higher risk of investment loss compared to fixed deposits which is a fixed return instrument and very low risk.

Stock-A vs Stock-B

But the problem happens when you apply the same logic, to compare investment in Stock-A with investment in Stock-B. In this case Stock-A is a good quality stock with credible management, rock solid business, predictable income & good growth, offering stable returns and consistent dividends year after year. Stock-B on the other hand is a penny stock, with a management you never heard of, running some business that is worth a billion dollars but you never saw or used its products, income is expected to double / triple every year, and as far as returns are concerned, this stock is your ticket to the millionaire club by putting in just a few thousands. Soon all your dreams are going to come true and you will never have to work a single day in your life! And the best part, for some great reason you are among the chosen few who came to know about this stock in a market full of expert bargain hunters, an undiscovered gem. You understand that there is high risk in this investment but hey "high risk high return" right ? WRONG.

Why choose Stock-A?

If you choose Stock-B for investment, this is exactly where things go wrong. This is exactly where "high risk high return" is absolutely wrong and guaranteed to bring you misery. This is where "low risk high return" becomes true and "high risk high return" becomes completely foolish. You should have invested in Stock-A instead of Stock-B and you would have made a decent return for yourself. It will not make you a millionaire overnight, but remember, STOCK-A WILL MAKE YOU A MILLIONAIRE (by power of compounding, a separate topic).

Moral of the story

When comparing equity investments with fixed deposits, "high risk = high return". When comparing Stock-A with Stock-B "low risk = high return". SIMPLE. MIND IT!