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BABY STEPS
IN MANAGING
INVESTMENT RISKS
Worried?
Its OK
An approach developed
through years of trial
and tribulations
A Value
Investor’s
Perspective
i4value.asia
How To Mitigate Risks
When Value Investing
2 views of risk
1. Volatility
2. Permanent
loss of capital
Baby steps in assessing
permanent loss of capital
i4value.asia
READ
Not Volatility but
Permanent Loss of Capital
Managing risk when investing
2-levels approach
• Allocate net worth
• Risk mitigation for each asset class
3 Buckets asset allocation
Bucket 1: liquid assets
eg cash
Bucket 2: safe assets
eg govt bonds
Bucket 3: risky assets
eg stocks, real estate
For emergencies
Floor net
worth
Generate
returns
3 Buckets – amount in each bucket
Bucket 1
Bucket 2
Bucket 3
2 years annual expenditure
8 year annual expenditure
Balance of net worth
Amount
depends
on risk
tolerance,
job status,
lifestyle
• Identify causes of the
loss of capital
• Assess its impact and
likelihood of occurring
• Adopt host of mitigation
measures
Risk mitigation approach
4 risk mitigation strategies
Accept
Avoid
Transfer to another party
Reduce
Mitigation measures when investing
Look at downside and let
the upside take care of itself
• Adopt conservative approach
• Have margin of safety
• Focus on quality stocks
• Diversify
• Invest long term
• Be prepared to cut loss
Conservative approach
Use conservative
estimates and
assumptions
Understand the
company’s
business
economics
Margin of safety - buy at a discount
$
Asset Value Earning Value
Compare Price
with Valuation
Earning Value Price
Margin of safety – Scenario 1
$
Asset Value Earning Value
Excellent margin
of safety
Earning Value Price
Margin of safety – Scenario 2
$
Asset Value Earning Value
Acceptable
margin of safety
Earning Value Price
Margin of safety – Scenario 3
$
Asset Value Earning Value
Better than
acceptable margin of
safety
Earning Value Price
Margin of safety – Scenario 4
$
Asset Value Earning Value
Poor margin of
safety
Earning Value Price
Focus on quality
Invest in companies that can create
shareholders’ value
Use academic
“quality” indicators
• Beneish M Score
• Piostroski F Score
• Altzman Z Score
Diversify
Studies show that the benefits
of diversification becomes
marginal after 30 stocks
• Target to have 30 stocks in the portfolio
• Each stock = Portfolio $ amount / 30
Risk
Number of stocks
Long term investment horizon
Helps to mitigate
short term volatility
3 Buckets
provides peace of
mind when holding
for the long term
Be prepared to cut loss
Sell if
investment
thesis is no
longer valid
Sell if you have
made a mistake
in the
assessment
X
Summary
• Allocate net worth with 3 Buckets and have
risk mitigation measures for each asset
• Look at downside and let the upside take
care of itself
➢ Conservative approach
➢ Margin of safety
➢ Focus on quality stocks
➢ Diversify
➢ Invest long term
➢ Be prepared to cut loss
• Not Volatility but Permanent Loss of Capital
A site dedicated to learning how to invest
through investment case studies
i4value.asia
Thank You

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Baby Steps in Managing Investment Risks

  • 2. Worried? Its OK An approach developed through years of trial and tribulations A Value Investor’s Perspective i4value.asia How To Mitigate Risks When Value Investing
  • 3. 2 views of risk 1. Volatility 2. Permanent loss of capital Baby steps in assessing permanent loss of capital i4value.asia READ
  • 4. Not Volatility but Permanent Loss of Capital Managing risk when investing 2-levels approach • Allocate net worth • Risk mitigation for each asset class
  • 5. 3 Buckets asset allocation Bucket 1: liquid assets eg cash Bucket 2: safe assets eg govt bonds Bucket 3: risky assets eg stocks, real estate For emergencies Floor net worth Generate returns
  • 6. 3 Buckets – amount in each bucket Bucket 1 Bucket 2 Bucket 3 2 years annual expenditure 8 year annual expenditure Balance of net worth Amount depends on risk tolerance, job status, lifestyle
  • 7. • Identify causes of the loss of capital • Assess its impact and likelihood of occurring • Adopt host of mitigation measures Risk mitigation approach
  • 8. 4 risk mitigation strategies Accept Avoid Transfer to another party Reduce
  • 9. Mitigation measures when investing Look at downside and let the upside take care of itself • Adopt conservative approach • Have margin of safety • Focus on quality stocks • Diversify • Invest long term • Be prepared to cut loss
  • 10. Conservative approach Use conservative estimates and assumptions Understand the company’s business economics
  • 11. Margin of safety - buy at a discount $ Asset Value Earning Value Compare Price with Valuation Earning Value Price
  • 12. Margin of safety – Scenario 1 $ Asset Value Earning Value Excellent margin of safety Earning Value Price
  • 13. Margin of safety – Scenario 2 $ Asset Value Earning Value Acceptable margin of safety Earning Value Price
  • 14. Margin of safety – Scenario 3 $ Asset Value Earning Value Better than acceptable margin of safety Earning Value Price
  • 15. Margin of safety – Scenario 4 $ Asset Value Earning Value Poor margin of safety Earning Value Price
  • 16. Focus on quality Invest in companies that can create shareholders’ value Use academic “quality” indicators • Beneish M Score • Piostroski F Score • Altzman Z Score
  • 17. Diversify Studies show that the benefits of diversification becomes marginal after 30 stocks • Target to have 30 stocks in the portfolio • Each stock = Portfolio $ amount / 30 Risk Number of stocks
  • 18. Long term investment horizon Helps to mitigate short term volatility 3 Buckets provides peace of mind when holding for the long term
  • 19. Be prepared to cut loss Sell if investment thesis is no longer valid Sell if you have made a mistake in the assessment X
  • 20. Summary • Allocate net worth with 3 Buckets and have risk mitigation measures for each asset • Look at downside and let the upside take care of itself ➢ Conservative approach ➢ Margin of safety ➢ Focus on quality stocks ➢ Diversify ➢ Invest long term ➢ Be prepared to cut loss • Not Volatility but Permanent Loss of Capital
  • 21. A site dedicated to learning how to invest through investment case studies i4value.asia Thank You