Commentary
“Risk management is the bedrock of our firm” is often a line you hear when managers or advisers talk about their strategy and approach to the markets. What you rarely hear is an in depth explanation of what that supposed bedrock is actually made up of. What is the actual process a manager goes through in assessing all of the perceived as well as potential unperceived risks in a particular investment or strategy? What does it mean to manage risk in real time? Do you manage risk for individual positions or the entirety of a portfolio?
When I talk to new traders or managers about risk management I want to know how they think about taking losses. For me a firm understanding of the fact that loss taking measures aren’t just prudent but a necessary ingredient to a successful plan. Furthermore I would argue this is agnostic to time frame. If you are managing positions for two minutes or two decades you must have a process to determine when you are wrong and going to take a loss. This should be the first lesson a registered financial person in training should have to take. Something to the tune of “Taking Losses 101: How to Live to Fight Another Day.” Some day I may try and teach such a class, but sadly this is precisely the opposite of what most learn when going for their different financial designations.
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