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Why it’s Important to Consider an Investment’s Risks and Rewards Together At All Times

During a bull market, most investors are focused on the reward they can gain from a market rally. During a bear market, however, most investors are focused on the risks that they will be facing if they’re investing.

Yet, the discussion of risk should never be separated from the potential rewards. It is by understanding the relationship between the risks and the rewards in each opportunity can we make an informed decision about an investment.

We can use a company like Global Logistic Properties Ltd (SGX: MC0) as an example.

Tracing the ascent

When Global Logistic Properties got listed in 2010, China was already an important geographical market for the firm. An optimistic investor might feel that the company has a huge opportunity in the country, given that it is one of the largest players in the modern logistics market there. Moreover, with its technologically advanced warehouses and logistic centers, the company is also well-positioned to serve China’s e-commerce industry as it grows.

All these are great growth theses for Global Logistic Properties. It might very well be the reason why we saw the company’s share price rally from its IPO (initial public offering) price of S$1.96 to a peak of more than S$3 in 2013.

But while the future of e-commerce and the economy of China may indeed be much larger in the future, how much were investors paying for those rosy outlooks when Global Logistic Properties was valued at 19 times its trailing earnings at its peak in 2013? That’s where consideration of risk – the downsides involved – comes into play.

In considering the rewards, we must pay attention to the risks too.

Plotting the fall

Lately, stocks in Singapore and elsewhere have fallen. Fears of a slowdown in China are becoming a reality (the country’s 6.9% gross domestic product growth in the third-quarter of 2015 is the first time it has dipped below 7% since 2009)  and investors are unsure how a possible future rate hike by the Federal Reserve in the U.S. might impact the global economy.

All these uncertainties are adding to the negative outlook of Global Logistic Properties, which has seen its shares fall from a peak in 2013 to the current level of around S$2.10.

But again, while the threats of a slowdown in China and the raising of interest rates are significant, are investors well compensated for these risks with Global Logistic Properties now trading at only 12.6 times its earnings?

In thinking about the risks associated with any company, we should also care about the potential rewards that may come about due to a firm’s valuation.

Foolish Summary

Risk and reward are two sides of the same coin. Investors should always look at both faces of the coin when evaluating an investment at all times instead of merely focusing on only one angle of the story.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.