Risk Assessment Idea to consider

On a long walk last night with my dog, I got to thinking about how we investers determine which programs we'll put money into, and which we won't. We all make these decisions, and we all have our own methods.

I have a lot of experience with contingency planning and risk management over my years in business, and thought that some of those principles might be helpful here.

So I've come up with a model. All models need a snappy acronym , so I came up with SAP.
This is an attempt at a risk ratio that could rank, relatively, a new program, and help an investor figure out if the program is worthy of hard-earned money.

A high SAP ratio means the investor is probably a SAP for investing, a low SAP means the investor is probably very smart, and likely to be very happy over the coming months and years.

Here's what the terms mean:

S = Severity of a program failure to the investor
A = Administrator evaluation
P = Probability of a program failure

The equation is S x A x P. Each has a five number scale, as explained below:

S Severity of a program failure to the investor
1 = profit will be paid and principle will be returned in full to each investor
2 = principle will be returned in full to each investor
3 = partial principle payments will be made, if possible, to each investor
4 = no funds will probably be returned to any investor
5 = no funds will ever be seen again by any investor

A Administrator evaluation
1= personal, face-to-face, hand-shake relationship with Administrator who is honest and known to be entirely competent and trustworthy
2= e-mail-type relationship with Administrator who is honest and thought to be competent and trustworthy
3 = e-mail relationship with Administrator who responds, and seems to be honest and competent
4= Administrator hasn't been contacted, with only sketchy contact info, address, etc.
supplied
5= Administrator is unknown, no information available, no contact has been made

P Probability of program failure
1 = Trading is the exclusive profit generator, trading history gives high confidence, skilled and experienced traders, good money-management skiils over several + years, program doesn't need referrals income, no back office
2 = Trading is main (not only) profit generator, trading history gives some confidence, good trading skills seen, some money-management skills seen, referral income may/may not be needed, no back office
3 = Trading is a smaller part of profit generation, little trading success evidence, unknown money-management skills/methods, referral income important, front office
4 = Ponzi-type program probable, no evidence of trading, unknown money-management scheme, emphasis on referrals and new money, front office
5 = Ponzi-type program for certain, completely dependent on new money, Gold-coders script front office

A few examples of the use of the tool:

1. Absolute ponzi, no trading, unknown admin, no history, can't do DD:
SAP= 5 x 5 x 5 = 125

2. Forex-based program, scrupulously honest admin, years of solid results, personally known to investor (or Bluemax), Administrator has said she/he will pay back principal to all investors if the program fails:
SAP = 2 x 1 x 1 = 2

3. Trading is one of the main activities, some good history reviewed, other HYIP's are invested in as well, Admin is a bit unknown but seems OK, referral income is important, no promise of any return of anything if things go bad:
SAP = 4 x 3 x 3 = 36

I think I'm going to develop this method for myself, and use it to firm up my decision-maiking process. Perhaps some of these ideas, at least, may be helpful to you.
If so, that would be very good.

A HYIP Rating Service could use this type of guideline as their criteria for listing, whether a number of stars system, a numerical rating system or similar.

The HYIP Administrator who wanted a lower risk number would have to contact the rating service and do at least some of the following:

- establish a relationship
- share communication methods, e-mails, addresses, ICQ's, etc.
- discuss profit-making methods, strategies, etc.
- show trading histories
- develop confidence
- discuss program continuity plans, ideas
- etc, etc.

Over time, the Admin's who did this type of legwork would become successful, and the straight-out Ponzi's would never get listed. The Rating Service's job would be easier, since he/she would have to be contacted by the HYIP, or the program wouldn't get listed by the Rating Service. Also, as more honest data is given and proven, the rating would improve accordingly.

Author Freighter