Thomas E. Finser
Risk Management
I define risk as permanent capital loss. Since a living, breathing business underpins stock value, price volatility is tolerable, necessary, and acceptable. Portfolio weightings, sector allocations, and geographic focus depend upon opportunity. Rather than scatter my investment edge in the winds of formulaic diversification policies, I focus resources on the highest quality opportunities. My personal portfolio, therefore, is rarely optimized for beta, or short-term, market direction models.
Position sizing begins with high-conviction investments, which often increase with time—not to bottom-tick but to enter a position in which market volatility or an apathy vacuum provides opportunities. Great ideas are rare. Capital, therefore, is focused accordingly. In other instances, portfolios are organized under thematic umbrellas which each have several names—particularly for an industry that has been obliterated. The vast majority of assets are concentrated in less than a dozen names with several tent-pole positions.
Risk management concerns not only the analytical framework of portfolio construction and position sizing of what to buy and when. Self-regulation (metacognitive regulation) and continuous creation of a personal environment optimized for clear thinking also play important roles. Equanimity in markets good and bad is supported by certain habits, including but not limited to:
I do not wish to be contrarian for its own sake. Effectively used, the systematic alignment of self, strategy, and discipline, however, often leads to a contrarian position. I find myself going against the crowd because this harmony of self, strategy, and discipline provides the self-confidence necessary to independently pursue my own goals. This alignment then is the foundation of my investment edge.
Disciplined capital allocators are also beneficiaries of an unknowable alchemy of luck, intuition, and insight. Although I have focused on the process of insight and analytical thought, other subjective variables such as intuition are equally relevant. Learning to trust one’s inner voice is crucial to profitably exploiting variant insights gleaned from the analytical research process.
Often, the din of incessant media inputs and the nitty-gritty business of managing money drown out this inner voice. Therefore, I commit equal energy to fostering a lifestyle and environment that allow my inner voice to break through. I must carefully pick the people I work with, turn off the machines, and tune into a different channel. Hearing my inner voice often requires saying “no” to an endless parade of external stimuli and not doing things simply for the money. Under these conditions, I am in the zone, content, focused, and relaxed. Ted Williams called this state the happy zone for a reason.
I define risk as permanent capital loss. Since a living, breathing business underpins stock value, price volatility is tolerable, necessary, and acceptable. Portfolio weightings, sector allocations, and geographic focus depend upon opportunity. Rather than scatter my investment edge in the winds of formulaic diversification policies, I focus resources on the highest quality opportunities. My personal portfolio, therefore, is rarely optimized for beta, or short-term, market direction models.
Position sizing begins with high-conviction investments, which often increase with time—not to bottom-tick but to enter a position in which market volatility or an apathy vacuum provides opportunities. Great ideas are rare. Capital, therefore, is focused accordingly. In other instances, portfolios are organized under thematic umbrellas which each have several names—particularly for an industry that has been obliterated. The vast majority of assets are concentrated in less than a dozen names with several tent-pole positions.
Risk management concerns not only the analytical framework of portfolio construction and position sizing of what to buy and when. Self-regulation (metacognitive regulation) and continuous creation of a personal environment optimized for clear thinking also play important roles. Equanimity in markets good and bad is supported by certain habits, including but not limited to:
- Journaling. This activity encourages reflection and heightens emotional self-awareness. Keeping a daily journal creates a record of ideas and facilitates self-knowledge of how one interacts with the market given various external stimuli. This practice stimulates new ideas and boosts mental flexibility.
- Routine. Instead of news and emails, the day begins with high-margin projects, research, big-picture thinking, and rigorous physical exercise. Secondary routine activities such email correspondence are attended to after the morning productivity slam. Often, the ideas with the highest payoff arise spontaneously from the stability of a not-too-rigid routine.
- Information automation and filtering. Information filters are critical. Not every newspaper must be read; not every sell-side report, conference call transcript, TV show, blog, or Twitter account is worthwhile. Such noise is a costly distraction. While learning is ongoing and never completed, I aggressively filter out short-cycle news, TV, newspapers, and radio.
I do not wish to be contrarian for its own sake. Effectively used, the systematic alignment of self, strategy, and discipline, however, often leads to a contrarian position. I find myself going against the crowd because this harmony of self, strategy, and discipline provides the self-confidence necessary to independently pursue my own goals. This alignment then is the foundation of my investment edge.
Disciplined capital allocators are also beneficiaries of an unknowable alchemy of luck, intuition, and insight. Although I have focused on the process of insight and analytical thought, other subjective variables such as intuition are equally relevant. Learning to trust one’s inner voice is crucial to profitably exploiting variant insights gleaned from the analytical research process.
Often, the din of incessant media inputs and the nitty-gritty business of managing money drown out this inner voice. Therefore, I commit equal energy to fostering a lifestyle and environment that allow my inner voice to break through. I must carefully pick the people I work with, turn off the machines, and tune into a different channel. Hearing my inner voice often requires saying “no” to an endless parade of external stimuli and not doing things simply for the money. Under these conditions, I am in the zone, content, focused, and relaxed. Ted Williams called this state the happy zone for a reason.