Risk Control: What Goes For Insurers Applies to Banks

0
Risk Control: What Goes For Insurers Applies to Banks
Photo by <a href="https://pixabay.com/en/users/geralt-9301/">geralt</a> (<a href="https://pixabay.com/">Pixabay</a>)

Each of the situations I used as examples yesterday, I have personally run into, and I could write about more of them.  Good investment and risk control shops do their home work in advance.  They ask questions on what could go wrong with a given investment or product; they are willing to negatively but not unreasonably imaginative.  Warren Buffett has said something to the effect of, “We’re paid to think about the things that can’t happen.”

Risk Control: What Goes For Insurers Applies to Banks

What I said about life & commercial insurers goes double for the banks.  Those insurers have long liabilities, which gives them more time to bounce back from asset disappointments.  The short liability structures of the banks give them less time to deal with asset problems.

Greenlight breaks even for Q1 after damage to its short book [Full Letter]

david einhorn, reading, valuewalk, internet, investment research, Greenlight Capital, hedge funds, Greenlight Masters, famous hedge fund owners, big value investors, websites, books, reading financials, investment analysis, shortselling, investment conferences, shorting, short biasDavid Einhorn's Greenlight Capital was down 0.1% for the first quarter, underperforming the S&P 500's 6.2% return. In their letter to investors, which was reviewed by ValueWalk, the Greenlight team said a lot happened during the first quarter even though they made just a handful of changes to the portfolio and essentially broke even. Q1 Read More


All of this implies having disciplines for buying assets, and re-evaluating assets in any portfolio.  My discipline evaluates these at mid-quarter, when few others are doing their evaluations.

The idea is to be ever and always forward-looking.  The past doesn’t matter, except to serve as grist for the mill, showing us what can happen.

Good investing does not care about entry prices. Good investing is like the great Wayne Gretsky, who did not care about where the puck was, but where it would be.  This is why when I invest I am always comparing the assets in my portfolio versus alternatives.  I look for what will do well in the future.  I do not care about past gains and losses.

Good investing cares about trading what is good for what is better.  This is easy for bond managers.  A bond manager with skill, and freedom to execute can make many wise trades to improve a portfolio.  All he has to do is buy bonds with yields that compensate for the risks, and sell bonds that don’t compensate.

For equity investors the calculus is more vague, but it still exists. Look to where you can earn returns on average.  Find enough of those areas so that diversification works.

I have never run an index-like portfolio, unless it was an accident.  I will occasionally throw a company in for diversification reasons, but my main goal is owning cheap assets that will earn far more than the index.

Good investing involves business knowledge.  That means you understand how money is made across the set of companies that you invest in.

Whether you are an investor or not, if you want to make greater progress in your career, you should try to learn the financial aspects of your company.  That will stand you in good stead for those that look for managers, because those who understand the profit model are far more valuable than those that don’t.

I stand with Buffett, “I am a better businessman because I am an investor, and I am a better investor because I am a businessman.”  Outside money and inside money can learn from each other, leading to a better investing result.

Summary

I offer to all investors this simple idea, trade what is less good for what is better. It will improve your returns.  Continually improve your portfolio, and do not be married to any ideas.  The idea of relative improvement of the portfolio has aided me greatly in portfolio management.  It is easy to swap bond for bond, and relatively easy to trade stock for stock.  Asset allocation decisions are more difficult.  Figuring when to trade stocks, bonds and cash between one another is far more difficult.

By David Merkel, CFA of alephblog

Previous article Daniel Kahneman: Two types of thinking, fast and slow; System 1 and System 2 Explained
Next article Instagram Video Beats Twitter Vine By A Wide Margin
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

No posts to display