Control The Controllable Part 2: Liquidity Risk
“The essence of investment management is the management of risks, not the management of returns.” –Ben Graham Since 1982, the investing world has only experienced declining interest rates – due primarily to low and containedlevels of inflation. Since the Great Financial Recession of 2007-09, the world has largely only experienced quantitative easing and abundant liquidity […]
Control The Controllable
“Forecasts create the mirage that the future is knowable.”–Peter Bernstein The investing year of 2022 shocked most investors with inflationary forces as the primary root cause. Since 1982, the investing world has experienced declining interest rates – due primarily to declining inflationary forces. In addition, the developed markets have become accustomed to high levels of […]
Stress Testing Is Key To Risk Management
“The essence of investment management is the management of risks……not the management of returns” –Ben Graham The current investing environment may be classified as “increasing uncertainty” given high inflation, increased geopolitical conflicts, materially higher interest rates, and potential recession among other headwinds. A successful investment operation will own various securities, assets, and businesses that are […]
Income Investing In A Rising Rate Environment
Interest rates are like gravity in determining the overall stock and bond market valuations. A high interest rate increases the gravitational pull-on valuation. Conversely a low interest rate has less gravitational pull. Translation, higher interest rates equal lower prices and lower interest rates equal higher prices. Since 1982, asset prices have been increasing, due partly […]
The Risk Of High Growth Expectations
Growth Expectations Often Overly Optimistic The analysis of historical growth rates is best illustrated by the McKinsey book “Valuation.” McKinsey categorized all companies into 1 of 5 portfolios depending on their respective growth rate in the base year. As the following exhibit shows, high growth is not sustainable and quickly decays within 5 years, but […]
Margin Of Safety
Adequate Diversification = Insurance A poor outcome may occur at the individual security level even though an adequate margin of safety appeared to exist. But as the number of holdings increases, the more certain it becomes that the aggregate performance will result in positive outcomes over time. The element of diversification is the same basis […]
Continuously Assess Risk: Inflation Risk
INFLATION RISK Inflation is too much money chasing too few things. Inflation results in the decline of purchasing power of a currency over time and measures the rate which the value of a currency is falling or being debased. The Federal Reserve has a stated target of 2.0% inflation……which means the dollar will be worth […]