Investors in capital markets understand the connection between risk and return – higher the risk, higher the return. This is simplistic. To make this complete we need to add the elements of time spent in the investment and the ‘prospect’ or ‘expectation’ in the return.
The point is that all market linked investments are priced dynamically. Hence, there are minute to minute deviations in their price and return expectations. However, the longer the holding period, the dynamic price will eventually regress or settle towards the mean or the intrinsic value of the asset.
Also, let us not forget, for an investment in which the risk-assessed initially, has eventually gone bad, the price will settle towards its intrinsic value which at times may tend to zero.
Coming back to the self-evident truth about higher the risk higher the return, the situations when this may not come true are – when the timing of entry/exit is caught on the wrong-foot due to price volatility and when the investment may turn out to be a dud. Simple!
With this background understanding let us, going forward, try and understand how this impacts short-term trading versus long term investment. We will also add the perspective of off-market investment, private equity and venture capital.
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