Avoiding risk
We primarily avoid risk by not investing in what we don’t understand.
Amazon is a great example. While it is probably the most powerful business force in the world at the moment, its price fell twice by 90%, which forced enough people to believe that the company had lost its competitive edge. This is the kind of risk that we avoid and why we don’t generally invest in popular tech stocks.
Managing Risk
• Our hedging activity and cash positions are the main tools for managing portfolio risk.
• We are comfortable holding large cash positions if we feel that our portfolio companies are not attractively priced to offer a good risk-return profile over the long term.
• We tend to hedge the portfolio from a large drawdown in equity prices when we foresee one of two conditions developing:
i) recession risk
ii) multiple compression risk.
We primarily use index options to hedge both these risks.