Managing Downside Risk In A Downturn! – ValueWalk Premium
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Managing Downside Risk In A Downturn!

As value investors, a lot of us are starting to find the environment to be idea rich after a long time. Finally, the valuations are compelling, the companies we have researched are cheap, the war chest is ready to crack open, ready to be used. During such times, there are new risks that needs to be actively managed. While I watched the 2009 recession hunting for a job in the U.S, I did not live through the panic in the securities market during the recession of 2008/9. This is my first real test. There have been drawdowns in the past which have been sharp and never so deep.

Q4 2019 hedge fund letters, conferences and more

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One of the risks is through concentrated positions. A ton of wealth has been made through concentrated positions. 2-3 years from now, when the markets are back up (hopefully) there will be stories about investors who bought by the truckloads during the downturn and made a killing on some of the ideas. What won’t get said, are the ton of the people who got crushed during the downturn by investing in concentrated positions (2/3/4 positions) and the companies going to zero. Survivorship bias will exist in this regard. People recall Mike Burry a lot more than Bill Miller. It is highly preferable to give up some upside in order to reduce the chances of going back to Go on the board.

Here is where capital allocation and portfolio management go hand in hand. As much as tempting it is to back the truck into a certain securities and concentrate, a dose of diversification will prevent complete blow ups from happening. There are multiple ways this can be achieved. Buying a basket of stocks in a similar category, allocating a certain % to index funds, looking at preferred stocks, closed end funds, special situations etc. can provide other opportunities even in the securities space. Of course, this conversation here is limited to the securities space where we are finding bargains at this point. Other asset classes are not considered here.

Some of the steps that I am taking while managing through this downturn :

  1. Kept aside cash required to manage next 2-3 years + emergency cash even I were to lose my job.
  2. Had a clear plan written down on how portfolio management would happen in a 30-40% down market when I was clear and lucid.
  3. Diversifying more than usual while adding new bargains
  4. Baskets of stock in a similar story. Everything might not go to zero (unless my stock picking skills are similar to the CDO’s constructed by US banks a decade ago)
  5. Index funds / quasi index like Berkshire get a certain allocated % of the capital allotted
  6. The rules make is tougher and tougher to double down into the same ideas

I am very interested to see how this will pan out. While the ride has been painful, I am far from panicking yet. Just a pit in the stomach once in a while so far.

Article by Beowulf Capital


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