The performance over the past four weeks has continued to be disappointing. The portfolio lost 258bps, the market lost 398bps and the portfolio returns were achieved with half the volatility of the market. Despite this, I have missed out.
The main reason for this is my poor risk management. Earlier on in the year, I made the terrible decision of investing a considerable percentage of the portfolio in Aeropostale which subsequently lost around 70% of its value. In this case, good risk management meant my losses were very small considering that I picked one of the worst performing stocks possible over the period that I held it. It took me a while to work out what was going on and I was extremely reluctant to drop positions but I eventually got myself into a decent position after this debacle. Unfortunately, despite “being right” in where I chose to reallocate money my risk management was terrible. So this will be the focus of this review. I will take a look at what has continued to go wrong and think about I can improve my position. Inevitably, this is going to be another post on the pragmatic side to value investing when cheap stuff gets cheaper. I will start off with a brief overview of how my views about value investing have changed.
I think the importance of managing risk is completely underrated by most value investors because the fundamental idea of a “value investment” is the market is wrong and the investor is right. I have always been slightly troubled by this. I seriously doubt I am a good analyst considering I have only been doing this a few years and I doubt I have the right information to make good decisions, in most cases. Obviously, this doesn’t fit in all cases. In particular, with smaller, illiquid stocks I think the opposite sometimes holds. You can be a good analyst and you can get good information. Indeed, some people may have access to slightly better or more useful information all the time. Assuming we aren’t that lucky though it isn’t clear how important this is. In particular, the biggest problem is that we don’t have infinite sources of liquidity when markets fall. Everyone has to make active choices about the level of the market all the time, even though they don’t realize it, through their decisions about what level of…
