Investment Approach - Defining and Controlling Risk
Market volatility is a short-term expectation driven phenomenon which is highly correlated with the propensity of humans to overreact. We feel it is important to differentiate our view from that of the typical assessment which tends to contrast fear and greed as distinct behavioral poles. We believe fear is the only driver of sub-optimal investor behavior and that greed is simply a variant of fear-motivated action.
Risk should be viewed as the potential for permanent loss of capital. The price volatility of a security or portfolio and the assessment of risk as defined by a value investor need not be inextricably linked as is the case with beta driven assessments such as CAPM or other deviation-based evaluations. We view volatility as a proxy for the occurrence of short-term investor misjudgment as opposed to a proxy for real risk. To that end volatility may well provide opportunity for profitable deployment of capital versus become a cause for hand wringing and desperation. The differentiation is in positioning, correct perspective of time and timeframe for investment. Generally, reactive behavior is framed largely upon one’s acute definition of eternity (i.e. immediate perspective of absolute time). Fear impairs focus and serves to compress the time assessment to be measured in terms of hours or minutes versus months or years. Therefore, what may be disastrous to one myopically framed may well be advantageous to another whose perspective is properly calibrated.
An approach within which analysis is concerned primarily with values supported by fact and not with those largely dependent upon expectations is the correct framework within which to formulate asset allocation decisions. We focus our efforts on being correctly positioned physically, analytically and emotionally, to capitalize on misjudgments of others while targeting meaningful spreads in portfolio upside/downside capture.
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