“The essence of investment management is the management of risks, not the management of returns.”
- Benjamin Graham
Our investment philosophy begins from this point.
Yet, “risk management” is not about avoiding risks. Indeed, absent risk, there is no opportunity to earn adequate returns to achieve most goals or to sustain wealth over the longer run. We have seen remarkable volatility in the past six months, but volatility in and of itself is to be embraced, as long as the potential downsides are managed.
Volatility risk is simply the periodic movement of the price of securities over a given time. This is the most persistent and common risk an investor must manage. Investors tend to view volatility as “good” or “bad”. Generally, investors cheer on volatility when it is positive and prices are rising. Conversely, they loathe negative volatility when prices are falling.
We take a more agnostic view and do not ascribe any “value judgment” to volatility. It is simply a feature of the markets within which we operate. Used thoughtfully and strategically, volatility becomes an indispensable tool for long-term investors. Furthermore, volatility risk is highly transitory and, if properly managed, has little impact on the long-term ability of investors to achieve their goals and objectives.> Read the chart of the week