Recommended reading on risk management

5th Apr '20 by Muggles

5 comments 438 reads

Hi all

After the first week of the COVID crisis wiping out my profits for the year, I'm currently sitting in cash. I've also created something of a re-entry strategy. Until the markets are a bit more stable, I'm planning on moving away from my high stock rank capital gain strategy to an income strategy. The reason being that in 10-15 years when I want to start using my portfolio to supplement my income, I want to do it with high quality dividend paying stocks, and so I might as well pick them up when they are 'on sale'. To this end, I've created a list of 17 high quality, large, historically (perhaps less right now) good dividend paying stocks which I'm ready to press the button on and feel I have done my due diligence on. Depending on how long this lasts, I might reserve a little cash to catch some growth stocks rebounding strongly, but I don't think I've got the experience (and Stockranks are untested in this scenario) to commit large amounts of cash to this safely. Once the markets are a bit more settled, my drip feeding of cash (and dividend income) will go back to my high stockrank capital gain strategy to build up capital until another few good dividend stocks look cheep.

My main difficulty right now is working out when to buy. If we forget about the price of stocks and I just try and answer the question "is now a time I'd want to invest in companies", the answer is probably no - the virus, recession (here and abroad), insanely cheep money, huge personal/business/government debt, brexit deal on the back burner, all make me think things will get worse. However, trying to avoid FOMO (particularly when if I bought these shares when I first wanted to, I'd be up 30% right now), and avoiding the temptation to invest out of (if I'm honest with myself) boredom isn't easy. So I'm trying to sit on my hands and focus my efforts and energies on things that might be more helpful. To that, end, I'd love to know your advice on books/sources to read on risk management and technical analysis.

Risk management is something everyone talks about, but I've yet to find a good read that goes into the quantitative and qualitative aspects of this. Any recommendations on this would be very welcome. I…

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ls2g08

5th Apr '20

This is a interesting topic, because from a individual investor POV, there is little written about it, and using an insitutional approach, may not neccessarily provide the results you want which is the level most books are aimed at. You could consider a text book like this, which covers lots of the fundamentals of risk management, VaR calculations, etc. However you may find there is not a huge amount of pratical use at it likely requires sophisticated risk management software packages to implement.

From an income perspective, you will want to become familiar with credit risk management, understanding balance sheets in detial and able to answer the question, will a company be able to sustain their dividend for x number of years.

However I think you sould take income from either capital gains or from dividends, and to separate the two is just mental accounting that may leave you worse off in the long run. If you get a 7% return per annum, you should be indiffent if it comes from divis or from stock price appreciation.

William K

After going through the books reviewed on the Financial Wisdom website (Youtube), it's clear that all the successful traders have one simple strategy for risk management: keep your losses small and let your profits run. They may go about it in slightly different ways but the principle is always the same. The 'secret' is discipline: being prepared to acknowledge you've made a mistake and getting out of a losing trade fast. Easier said than done.

Muggles

7th Apr '20

Wise words! Forget the complex models, cut your losses, run your winners. Thank you. That's the saying bit done, just need to work on the 'doing' bit.....

Thanks Is2g08. I think you're right - I took one look at that book and balked! I will however look more into credit risk management, and maybe some resources on balance sheets.

martinji

Have you read any of Taleb's books? there is a lot in them about risk management in one form or another, though more in terms of a strategic philosophy than a mathematical modelling - he's pretty much entirely dismissive of the latter.

Recommended reading on risk management

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Muggles

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