The Riskiest Places on Earth
Back when I was investing in emerging markets with Bill Mann, we dreamt up the concept of “omega” (Bill named it; it’s an apocalypse joke) to try to describe the relative excess return required to deploy capital in a country we perceived as riskier rather than in one we considered less so. In other words, if we were investing in Zambia (shoutout Zambeef) instead of Indonesia, we wanted to be sure we were being appropriately compensated for doing so.
But we never got around to calculating specific omega values for every country in the world. That not only didn’t seem worth the effort, but we also considered a lot of markets uninvestable. Well, leave it to an academic to one up us because calculating risk premia for every country in the world is precisely what NYU finance professor and valuation guru Aswath Damodaran does every July. Not only that, but he does so to two decimal points, so you can know that China is exactly 21 bps less risky than Chile (is it?).
I’ve learned a lot from Damodaran, so I’ll cut him some slack. But while the list is interesting and directionally correct (the least risky places on Earth are Australia and Canada and the most Belarus, Lebanon, Sudan, Syria, and Venezuela because apparently the model doesn’t account for venomous snakes), it also raises a question: At what point does attempting to quantify risk become meaningless?
For example, faced with the choice of putting money to work in North Korea at a 21.96% return or Laos for 19.01%, I’d choose neither. Because my experience is that good risk management isn’t just about calculating the price at which you’d do something – it’s knowing what you’d never do at any price.
– Tim
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