The risks we forget

We almost always talk about the same risk: that the price falls. But there are others, more discreet. And they often hurt the most.

The first is liquidity. The price exists on the screen. But nobody is there to buy.

Say a house valued at three hundred thousand euros. To sell it tomorrow morning, you would have to cut the price, a lot.

A price is the last trade that took place. Not a promise that a buyer is waiting for your sale.

In a panic, everyone wants out through the same door. And the door narrows.

The second is the counterparty. Every contract has someone on the other side. And that someone can disappear.

In September two thousand eight, the bank Lehman Brothers went bust. Contracts signed with it suddenly had nobody left to pay.

Your bank, your insurer, your broker: each is a promise. A public guarantee covers part of it, up to a ceiling.

The third is the model. The calculation can be right, and the assumption wrong.

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A model learns from the past. If it has never seen a crash, it judges that one cannot happen.

Before two thousand eight, many calculations assumed American house prices would not fall everywhere at once. They did.

The fourth is concentration. It is the one we see least, because it is at home.

Your salary comes from one company. Your home is in its town. Your savings are in shares of that same company.

If it falls, everything falls on the same day: the job, the price of the house, and the savings.

It happened at Enron, in two thousand one. Many employees had their retirement in Enron shares. They lost job and savings together.

The fifth is currency. Your investment gains in dollars, but you live in euros.

Say ten thousand euros invested in American shares. They rise ten per cent, in dollars.

But meanwhile, for the example, the dollar loses ten per cent against the euro.

Result in euros: nine thousand nine hundred. Your shares went up, and you lost one hundred euros.

Plus ten, then minus ten, does not give zero. Percentages multiply, they do not add up.

These five risks have one thing in common: they do not show in the price curve. They wait.

Volatility shows every day. These show themselves only once, and often too late.

The defence starts with two questions. If I must sell tomorrow, who buys? And if the other side disappears?

Then a third: in my life, what depends on the same thing? Not putting everything in one place means that too.