Course 210: Operating Risk versus Price Risk
High Operating Risk and High Price Risk
In this course
1 Introduction
2 Low Operating Risk and High Price Risk
3 High Operating Risk and Low Price Risk
4 Low Operating Risk and Low Price Risk
5 High Operating Risk and High Price Risk

This playground is pretty much off limits to all but speculators and aggressive-growth investors. Most often, hot startups and small technology plays end up here. These are companies whose businesses are new or are so small that they carry a lot of operating risk. But they are also usually in popular or glamorous industries, which means that the market has put high price tags on those uncertain earnings. In order for their high-priced stocks to do well, these companies need to present some convincing evidence that they could be the next Microsoft MSFT. It is important to recognize the riskiness of any investment, and it's even more important to recognize that there are different types of risk to consider. A stock that's risky because its operations are unstable is a different kind of investment than one that's risky because it is expensive. How much of each kind of risk you're willing to tolerate depends on both your temperament and your time horizon. If every drop in a stock's price makes your stomach churn, you probably don't want a lot of price risk. And if you're about to retire, you probably want a predictable stock without a lot of operational risk. Balancing the two is not always easy, but it always makes for better investing in the long term.

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