• To allow shared access whilst maintaining a single copy of the files.
• To simplify backup to an external drive. I wouldn’t have to try and find important files on different machines.

The problem with regular backups to removable media is how frequent these regular copies need to be. I could loose a huge amount of information between daily backups, and I’d consider such a regime to be extremely rigourous.

So I decided to move to a Synology DS-207 NAS which provides the ability to use RAID drive mirroring… and the external backup too.

The mirroring keeps the contents of two independent 500Gb drives synchronised at all times: two independent copies of my precious data, and until last week it had remained untested. That was when the beeping started.

In my heart I knew what it meant, but I decided to double check the manual before booting my laptop and checking the web interface. There it told me that the RAID volume was broken, tried to repair the faulty drive, and finally pronounced it dead at the scene.

Gutted at the loss of my drive, I took heart from the fact the my data appeared to be safe, and I could still use it even if I was down to a single drive.

Feeling perilously exposed, I quickly ordered a new drive of the same size which, upon arrival, only took about 15 minutes to install. Once the NAS had booted up it verified the new drive was fit for purpose, formatted it and synchronised it with the crash survivor.

I’m not going to claim that RAID is a complete solution to data security; in addition I use external copies, cloned drives and off-site backup, but I’m definitely pleased with my decision, if only because of the continuity of workflow is provides in the face of a crisis.

I think that this is the basis of investment, but there’s a fine line between investing and gambling. It’s a matter of risk perception and probability; professional gamblers know the value of the safety play.

There’s always the temptation to take that single large punt on a risky investment in the hope it’ll pay off big… against all rational odds.

If it succeeds, we’ve a tendency to take on greater risk in the future. Eventually probability will catch up with us, and those risks generate a single crippling loss: the hallmark of a bubble.

If we failed at the first attempt, we’re left sitting on a massive loss, so what have we got to lose? Things can’t get any worse, right? This is probably what a lot of financial stock investors were thinking whilst they averaged down.

This is a slippery slope: do you give up on these risky practices, and try to slowly walk back into profit, or take one last risk in the hope that you can make it all back at once?

Personally, I prefer to think of myself as an investor, and the slow, steady, and above all balanced approach best suits my conservative tendencies.

These small businesses are staffed by the knowledgeable, enthusiastic types that originally gave birth to the Company. These are very high value individuals that will create that feeling of quality that niche customers prize so highly, and justifies your higher price.

Eventually, the time comes to make the decision whether to stay small forever, or start to scale up; and this is where disaster can strike.

Growing turnover is dependent on appealing to a larger market that rarely shares the values of your current clientele. Frequently prices must be reduced, but doing this on a large scale means cutting costs, especially wage bills. Poor staff leads to poor service, and to make matters worse, the decline causes those old hands to look for something better elsewhere… a downward spiral which can destroy reputations.

I’ve experienced this decline through several suppliers I’ve used over the years as they’ve attempted to grow. The message is clear: know your market, and when think carefully before making a decision you may regret.

I recently heard the founder of CMC Markets commenting, and I paraphrase, that traders call a bad trade an investment. At the heights of the last bull market, when M&A action was all that was sustaining prices, I have to admit that I nearly fell into this trap.

Whilst I feel that I’m confessing a sin: admitting to buying on market rumours, I avoided compounding the error by convincing myself that the stock would still be good value for the long term. It wouldn’t, the price was inflated, the fundamentals I ignored made that clear, and it was very unlikely to ever be worth what I paid for it.

Trading and investing are not the same thing, and require different strategies. Timing is important for a trade, as is close observation and the use of stop losses. An investment must represent reasonable fundamental value to be worth buying, so the precise dynamic of the current market doesn’t matter as much.

In future I’ll decide, in advance, whether I’m trading or investing.

This combination sounds a little contradictory, since asset allocation is the response to the perceived impossibility of deciding on price in a random walk down Wall Street: you can’t consistently outperform the market.

Whilst I don’t entirely subscribe to this sentiment, I believe it has good applications at the core of a portfolio comprised of these asset classes.

• Equity based mutual funds, diversified both by size and geographic region.
• Commodities based on ETCs.
• Geographically diverse corporate and government debt.
• Mutual funds directly invested in commercial property. If asset diversity is the goal, investing in property stocks doesn’t really cut it, they’re still equities.

This core represents about 80% of my portfolio, and I use fundamental analysis, alongside the actual asset distribution, as a method of timing my rebalancing and adding cash into the portfolio.

Fundamentals are key to actively managing the remaining 20% of my portfolio, which is mostly invested in UK equities, in the form of individual company stock, and both long and short index tracking ETFs.

This strategy remains unaffected by the Credit Crisis, but my execution has changed in two main respects; being honest with myself about objectives, and active use of cash within the portfolio. These will be the subjects for a couple of future posts.

The focus of this article was the fact that risk is perceived differently by different people and he offered an equation for risk.

Risk = Consequence x Likelihood x Outrage ⁽¹⁾

In investment it’s the outrage element that represents market sentiment, and it can spell disaster or opportunity.

Ever wondered at the drop in value of a high growth company’s stock when they report hugely positive results, that are only slightly below expectations?

Equally, outrage underpins contrarian investing: nobody’s surprised when a dog of a company reports poor results, but what if they’re good?

It’s not rational to expect a business to sustain double digit rates forever, and unrelated changes in long term cycles can improve the cash flow statement. The likelihood of either event may be similar, and the consequences for both company’s operations relatively minor, but the outrage, or delight, factor leads to disproportionate perceptions of risk; and hence return.

I’d love investment to be a rational activity where we could trust in the efficient market. With millions of individual human beings involved the outrage factor isn’t going anywere soon, so the only option is to try and understand it.

Reference.

1. Davies, Paul (2009) “Risky business.” The Chemical Engineer, (Issue 812), pp. 28–29.