April 10, 2021
7investing defines risk as the probability of permanently losing capital or significantly underperforming the market over the next decade. A company’s risk categorization is assigned by the Lead Advisor who recommends the company and might be given different categorizations if recommended multiple times by other advisors. Risk can stem from various factors, including;
As long-term investors, we will no longer define risk as to how much a company’s stock price might fluctuate each year. We believe this is better defined as volatility, which various factors can cause outside of a company’s control (e.g., the onset of the COVID-19 pandemic in March 2020 is a perfect example of this). All stock prices will eventually see volatility and often represent buying opportunities rather than signals to sell. Long-term investors have the luxury of tuning out short-term noise and focus on returns compounded over many years.
While these are loose definitions, we believe they best characterize how we think about our assigned risk ratings:
Of course, while not always the case, the most significant potential rewards can come from the stocks with the greatest risk. Investors should choose stocks based on their risk tolerance, financial goals, time frame, and personal conviction in each recommendation.
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