Page 81 - DMGT506_CONSUMER_BEHAVIOUR

Consumer Behaviour

Notes

Case Study The Risk Perception

ver had your friend exclaim at your investment choices with phrases such as "That
sounds like a very risky bet'' or "That's a very risky stock''? How about asking the
Efriend to rank your investment risk on a scale of 1 to 10. The friend stares back
blankly, implying either you have lost your marbles or they're lost in translation. So what
do you perceive as the risk in your investments?
Fundamental Risks
Risk in its varying degrees of perception is the magnitude of fear at the thought of losing
something. It could be the fear of losing your home, friend, mobile phone, or money.
When it comes to investing, the idea of the risks intrinsic in the business, its operations
and environment are also known as 'fundamental risks'.
To borrow the idea of investor Warren Buffet's 'fundamental' risk of investing in a business,
there are five primary factors in appraising this risk: The first would be on how confident
you are in your judgment of the long-term economics of the business you want to invest
in. Take, for example, the much-maligned telecom sector, which has been in the news for
deteriorating economics and expensive expansion.
Investing in this sector would entail having a perspective on how consumer behaviour is
likely to evolve over the next five years and whether consumers are likely to spend more
on value-added services or more time on the phone. Add to this, the large number of
players in several circles, which means little pricing power.
These are just a couple of factors in the economics of the business on which one needs an
informed perspective. A rapidly changing business is often a risky one for an investor
who is not watching it closely.
Human Element
The second and third factors deal with the ability of people to run their businesses effectively
and their propensity to reward the shareholder and themselves in a proportionate and
acceptable manner. Retail investors have traditionally had little say or sources on
management. However, gauging how effectively the company communicates to its
shareholders through interviews, press releases and annual reports can give you a cursive
idea of the management behind a stock. A crooked manager or misinformed, yet ambitious,
CEO is a major risk to an investor, considering how he can derail an otherwise good
business. An instance of such behaviour includes the Satyam episode that saw the slipshod
Maytas merger attempt as a prologue to the expose of Ramalinga Raju's number fudging.

The fourth factor is the effect of external factors such as inflation and taxes on a business.
Companies in sectors such as alcohol or tobacco have the constant risk of taxes being
hiked at various levels, considering how the products they produce are viewed as 'vices'.
Inflation ravages business with little pricing power or scope for passing on costs. Cyclical
industries such as automobiles and consumer durables have often been squeezed by rising
costs during periods of low consumer demand, as prices cannot be hiked.
Businesses which are easy scapegoats for government taxation or companies that can be
squeezed by the economic cycle are inherent fundamental risks. Sugar companies are a
classic example of a sector which gets pushed to extreme highs or lows depending on
Contd....

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