The Devil's Deal

21Taking risks

We stopped at Strasbourg and Conrad puffed out some hot air

and closed his eyes. Anisa picked up her book but looked at me.

‘I don’t really understand.’

The business of risk

I made a list of four possible investments on the inside cover of

Emotional Investment.

Shares in a supermarket

Government bond in your country

Shares in a Russian oil company

Shares in a luxury holiday company

‘You have to know all the risks before you buy any investment.

Which one do you reckon is the safest?’

‘The government bond. But I’m not really sure why.’

A bond is an IOU

‘A bond is a contract between the government (which is

short of funds) and a lender (who’s looking for somewhere

to invest). Unless the country goes bust, your money will be

safe. When you read textbooks on government bonds, they

always say governments never default on their payments of

interest or the repayment of capital. That’s simply not true

any more. But government bonds should still be the safest

investment you can buy in a country. A government relies

on tax income – personal income tax, taxes on the prots of

companies, sales taxes and many, many more – to pay back

the lender. Or, the government can borrow even more money

to pay off its loans.’

Anisa nodded, so I continued. ‘So, let’s put the bond at the top of

the list and then look at our three other choices.’

One-way ticket22

Government bond in your country Safest

2 Low risk

3 Medium risk

4 High risk

‘Hold on,’ she said. ‘I’m not sure of the differences between a

bond and a share.’*

‘The income on a bond is guaranteed. If the company goes bust,

the bond holder is towards the front of the queue of people who

will be paid. An investor’s time exposure to a bond is known

in advance. An investor planning a specic event in their life

– paying a child’s university fees, for example – will have more

control.’

‘At the end of a bond’s life, the borrower has to return the

principal, which is the borrowed money. And bonds tend to have

a very liquid market, so if an investor needs cash their bond can

normally be sold quickly.’

Shares can be low risk, medium risk and high risk

‘When you buy shares, you take the risks that the price may

fall and the dividend may not be paid. Unlike the government

bond, future price movements and dividends from a share are

uncertain.’

‘When you analyse shares you have to be aware of company-

specic risks. These risks are unique to an individual company.’

* The words share, equity and common stock are pretty much interchangeable in

the nancial markets. We will cover the differences between bonds and shares in

more detail in Chapters 5 and 6.

Five ways to create company-specific risk

Create an environmental disaster, and delay your response. The

clean-up after the Gulf of Mexico spill will cost BP at least $20 billion.

fast facts