The Devil's Deal

One-way ticket18

And,’ Anisa continued, ‘it seems the word risk doesn’t automati-

cally mean something bad for you nancial gurus.’

‘That’s right. For you, risk always means something bad. There’s

the risk of breaking your leg skiing, or the risk of losing your job.

By the way, where is it you said you work?’

‘I didn’t.’ Anisa smiled at me again but this time her eyes

remained cold. She wasn’t a woman who gave too much away

about herself. Never mind, I told myself, plenty of time left to

nd out more about her.

I continued. ‘Money men don’t see risk in the same way as the

general public. In fact, we love risk. Risk leads to return. And

return is our objective.’

Take a chance on me

‘I’ll give you an example. The safest investment in any country

is normally a government bond. Let’s assume you buy a Japanese

government bond which pays 3 per cent every year. You plan to

hold it for ten years, so your money can compound.

‘But if you took some risk, you could get a lot more return. How

much would you get in ten years if you chose an investment

which paid 10 per cent per year? And what about 20 per cent?’

Anisa invests ¥100,000 for 10 years

At 3%, her money will grow to ¥134,392

At 10%, her money will grow to ¥259,374

At 20%, her money will grow to ¥619,174

Conrad put up a pudgy hand to interrupt. ‘But risk means that

you can lose all your money. Why gamble with your savings?

When I receive money from my associates I want to preserve my

capital and get some growth. And I want to do it without taking

any risk.’

19Taking risks

Inflation has a big effect on your real return

‘But you’ve forgotten one really big thing, Mr Conrad. Ination.

Ination eats away at your returns. Bank adverts always quote

the nominal return but what’s vital to us is the real return. This

is what you get once you’ve stripped out the pernicious impact

of ination. The lower your headline return, the bigger the hit

from ination. Ination causes money to lose its purchasing

power.’

I sketched these gures out on a napkin.

If the nominal rate of Return is . . . 3%

. . . you need to strip out inflation of 2%

. . . to find the real rate of return 1%

Conrad looked crestfallen. Some men can turn anything into a

competition. He was clearly determined to have the last word on

this subject.

‘You young people think I’m some sort of fuddy-duddy. But I’ve

made steady returns over many years just by picking low-risk

investments.’ Conrad gave me the smile of a fat cat who owned

a fund dealing solely in premium-rated cream. ‘You can think of

me as the poor man’s Warren Buffett.’

‘Who?’ asked Anisa.

s

Who’s Warren Buffett?

He’s the best investor the world has ever seen, that’s all.

Buffett is the living embodiment of the value investor. He buys

shares when he believes them to be undervalued and because they

have long-term potential (‘our favourite holding period is forever’).

He prefers simple businesses that produce a long stream

case study