Risk management as a way of life
This is a great 5-minute clip by Whitney Tilson, reflecting on and summarising what he has learned about risk management in his investing career. During the video, he explains how excessive risk-aversion ended up putting him out of business during this bull market.
“I’m not a believer in any kind of computer tool or anything like that. Risk management is 98% judgement and it’s something you do every day. You have to live it and breathe it. It has to be in your DNA.”
As someone who worked for an insurance company in a former life, I do see value in heavy quantitative analysis for certain institutions – try running a bank or an insurance company without it!
But for investors who aren’t carrying heavy liabilities, on the other hand, especially those who are investing in specific equities with a long time horizon, I do agree that qualitative judgement becomes more important. Equity analysis typically requires us to analyse things like the character of management, brand value, competitive positioning, regulatory risk, the company’s long-term market share, and other factors which are very difficult or impossible to model in Excel.
Excel still has its place: when it comes to valuation and near-term forecasting, it can be a powerful tool in the effort to judge the expensiveness of a share. But if we plan to hold shares in a company for a long time (3-5 years or longer), then the qualitative elements become of paramount importance.
And I agree with Whitney that qualitative risk management isn’t just an afterthought: it’s at the heart of what an investor does. Bearing risk only when it’s attractively priced is the essence, in my view, of excellent investing. It’s what I’m working on all the time.
On a day when the FTSE is down by more than 2%, it’s nice to have a refresher of what this investing lark is all about: