The Devil's Deal

chapter

3

The leap of faith

Day 1, 4.45pm – The German–French border

‘People who invest for themselves – it could be your parents

or you in a few years’ time – only consider the return on an

investment. That’s how much they’ve made

or, sadly, how much they’ve lost. But profes-

sional investors approach this in a totally

different way. If you work as a trader or a

fund manager you begin with an assessment

of the risk and then factor in the return.’

Safety and danger

I ipped open Anisa’s notebook and began drawing a rough

graph.

‘We start with two lines. The one that goes from left to right

indicates the risk of an investment. The further to the right, the

more risk you’re taking.’

Anisa nodded comprehension.

‘And this vertical line is where we put the percentage returns we

expect.’

‘‘

begin with an

assessment of the

risk and then factor

in the return

’’

One-way ticket32

Most government bonds are low risk

‘We’re now going to plot our investments on this graph. The

safest investment is the government bond. What’s the risk?’

‘Low risk,’ she said.

‘We’ve said it’s risk-free, and that’s why it’s as far to the left as it

can be. How much return would you expect for a year?’

‘No idea.’

‘Come on, give me a number between three and  ve.’

She looked at me with a bemused smile. ‘Four.’

Return

0%

Low Medium

Risk

High

Return

4%

Low Medium

Risk

High

Government

bond

33The leap of faith

‘Good. So the government bond is risk-free and should pay us 4

per cent interest per annum. This is the safest possible investment

we can choose. Our capital is pretty much guaranteed. The

trade-off is that we will only make a small return. But, remember,

some investors are more interested in capital preservation and a

regular income than the chance of sky-high gains.’

You demand extra return for moving from bonds to shares

I turned back to my graph. ‘Imagine you are the supermarket.

How much more return do you need to offer investors? You have

to give them some extra reward for moving from the absolute

safety of the bond. The supermarket is a relatively safe business,

but there are many more risks than with the government bond.

How much more return would you need to buy a share in the

supermarket?’

Anisa pondered. ‘Six per cent more?’

‘That means you’re looking – on average – for an annual return

of 10 per cent from a stable share.’

‘Correct. Why don’t you plot it on the graph?’

I did.

Return

10%

Low Medium

Risk

High

Stable share

Government

bond