Some Risk is More Easily Managed
When investing offshore, there are many risks you have to deal with. Local legal systems, level of political stability, ownership rights, crime levels, business transparency etc. The level of control an investor has over most of these is minimal, however understanding how to mitigate these goes a long way to reduce your risk/return ratio.
The recent strike of Hurricane Ida on east coast of Nicaragua got me thinking about the different categories of risk:
Unknown-Unknowns
- Don’t know what the risk is
- Don’t know the impacts
Known-Unknowns
- Know what the risk is
- Don’t know the impacts
Known-Known’s
- Know what the risk is
- Known the impacts
Hurricanes in general are what most would consider a known-known.
The second thing to know about risk is:
Risk Exposure = (probability of occurrence) * (impact of occurrence)
Although hurricanes on the east coast of Nicaragua don’t happen all the time (last 3 based on a quick Google search were 98, 07, 09) this still represents a moderate risk exposure.
The key question becomes – if you can get the same investment with no risk exposure on this dimension why not do it? Although there are some great investment options available on the east side of the country in areas such as the Corn Islands, we focus our investments and those of our clients on the pacific side of the country to reduce risk exposure on a risk that can be easily mitigated.
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