Lesson Eleven: Understanding Financial Risk in Your “Il Dolce Far Niente” Journey
By Michael Lamonaca, 25 July 2025
In our pursuit of financial freedom and long-term wealth through disciplined investing, it’s essential to grasp the fundamental concept of risk. We often hear that higher risk can lead to higher potential returns, but it’s equally true that risk can lead to losing a significant portion, or even all, of your hard-earned capital. Our “il dolce far niente” approach seeks to navigate this balance by understanding and minimizing unnecessary risks, allowing our strategic holdings to compound value serenely over time and generate passive income.
To illustrate, consider a risk scale ranging from 1 to 5, where 1 represents the absolute lowest risk and 5 the highest. At the very bottom of this scale, a government bond is typically perceived as having the least risk, primarily because a government has the power to simply print more money to meet its obligations. Conversely, at the perilous peak of this risk scale, you might find something as precarious as a Ponzi scheme. When evaluating any potential investment, we always benchmark its potential return against the absolute lowest-risk alternatives, providing a foundational comparison point for our disciplined investing decisions.
Several factors contribute to financial risk, and understanding them is key to protecting your long-term wealth. One of the most common and potent causes is excessive debt, often referred to as liabilities. Debt essentially “speeds up time.” For a corporation, it allows them to acquire assets more quickly, rather than waiting to generate sufficient earnings. Similarly, an individual might take on a mortgage to own a home sooner, rather than saving the entire cash amount. There’s nothing inherently problematic about having a mortgage or a manageable amount of debt within a corporation. The critical word here is manageable. Just as an unmanageable personal mortgage can severely restrict your financial flexibility, a corporation burdened with a high amount of debt is inherently more vulnerable, particularly when economic conditions turn challenging. Our strategy prioritizes financially resilient companies that can withstand the test of time.
Another significant financial risk stems from price. Even the highest-quality asset can become a poor investment if acquired at too steep a cost. Consider the valuation of your home: it might be a beautiful, high-quality house, but there’s always a limit to what someone is genuinely willing to pay for it. The same principle applies when you buy a stock. If you pay an exorbitant price compared to the intrinsic value of the stock, your potential returns will inevitably diminish. This is precisely why we distinguish between price and true value in our approach: price is what you pay, but value is what you truly receive. Our disciplined investing seeks to acquire stocks where the inherent value is substantially greater than the market price, ensuring a strong foundation for future growth and passive income.
Finally, a profound type of risk often arises from simply not knowing what you are doing. While valuing a home might feel intuitive for most, the complexity vastly increases when dealing with stocks, which are fragments of real companies, often broken into millions or billions of pieces. Too often, investment decisions in the stock market are driven by emotion or fleeting trends rather than thorough, value investing principles, where all facts are meticulously examined. An investor who acts without genuinely understanding the underlying business and its true worth is unwittingly setting themselves up for this crucial financial risk, jeopardizing their path to financial freedom.