Risk Awareness and Downside Protection

Risk Awareness and Downside Protection


I started on a fixed income desk in 1999 right
out of college and it’s fair to say that my first 401k contributions were not only immediately
underwater, but I’m not sure if they ever have come back above water. If you think about that time period, it was
’99/2000, this great boom, followed by an enormous wreck, followed by the unfortunate
events of September 11. Right into that, you had WorldCom, Enron accounting
scandals. And still, while I was on a fixed income desk,
I saw AAA Corporate Studios that were LIBOR +40, supposed to be very safe investments
trading at $0.40 on the dollar. Pretty scary stuff. After I switched over to the equity side,
I had the fortune, or misfortune, of covering financials through the financial crisis. So there’s another huge drawdown. And then within that drawdown, the space I
was covering was right in the middle of it. And since then, it’s been straight up. So a lot of chaos for the first, call it 12,
14 years, and then straight up after that. But what stuck with me is the losses. Seeing those losses, not only in the 401k,
but seeing AAA investors lose 60% of their value, seeing the stock market go down 40%
twice and basically be flat over the first 14 years out of college, that’s formative. So when I look at value, I’m really risk focused. I’m focused, first and foremost, on downside
protection. I want to know how bad it can get for a stock
before I even look at how good it can get.

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