Risk Control

"Risk comes from not knowing what you're doing." - Warren Buffet

Among the risks that need to be controlled:

  • Market (Systemic) Risk - the term for the general risk faced by all financial assets.
  • Unsystematic Risk - the risk faced by a specific company.
  • Price Risk - buying or selling an asset at a poor price in the short term.
  • Liquidity Risk - choosing an asset that doesn’t sell often and can’t be bought or sold quickly.
  • Currency Risk - asset value changes caused by the price changes between two currencies.
  • Timing Risk - buying or selling an asset just before significant material information become public knowledge.
  • Tax Risk - executing an asset transaction in an unfavorable manner for final taxation.
  • Suitability Risk - buying an asset that you don’t understand well, and finding out it does not help you meet your goals.

SFS Core Investment Philosophies for Risk Management:

Several proven methods can be combined to improve results over long periods of time and control risk. The following summary describes some of these methods and discloses how SFS will approach managing all portfolios, and control risk.

  1. SFS will endeavor to understand and apply the work of Ben Graham and Warren Buffet, the best examples of shrewd, patient, and independent market investors. These investors demonstrate that choosing great assets at great prices and holding them until the market inevitably factors in the long-term value best constructs a portfolio. They advise “price is what you pay, value is what you get”. They warn that you can overpay for anything, even the best asset in the market. SFS will use their models of fundamental analysis to determine whether current market prices for any security is appropriate, and customer risk and market knowledge assessments to determine the suitability of a security for a client’s portfolio.
  2. Asset allocation is more important than choosing the perfect stocks and bonds. Good allocations, even without optimum assets, can still lower portfolio volatility, reduce stress, and minimize hasty decisions during rapid market price changes.
  3. Turnover, taxes, and excessive management costs are the enemies of the goal of total return.
  4. Market prices for financial assets are almost always inaccurate in the short term – that is they rarely reflect accurate long term-value. The price is often reflective of trading conditions that do not last and are not able to adequately resolve long-term uncertainties. Using fundamental analysis to figure out which prices seem to be over focused on the short term and discounting the long term often yields the best results.
  5. The only thing harder than calculating a good price is market timing.
  6. Long holding periods and dollar cost averaging significantly reduce the risk of buying at high prices.
  7. Investors often tend to believe trends will last longer than is reasonable, creating bubbles. As momentum, money, and support builds for an idea or asset, it is often time to sell and move on. Likewise, when the market loathes an asset, the prices are often the most attractive for the patient investor.
  8. When making large moves, we will buy or sell only half of the position when taking advantage of a great price. It is arrogant to think we can “call the turn”, top or bottom.
  9. Watch what occurs around us when people buy and sell products for their life and family. Their behavior may help improve decisions about financial products.
  10. Successful investing takes work and discipline. Most average investors as well as many financial advisors don’t do homework and are undisciplined, leading to failure. We will do our share of the work of research, and will approach the markets with disciplined strategies.
  11. Broad stock indexes tend to beat managers because it is very risky to invest all portfolio money in stocks. SFS will not chase the performance of any market asset or benchmark. Our benchmarks are client satisfaction, risk management, and client goal achievement.
  12. Finally, we will have a plan for each asset before it is bought. This plan will include price, size, and portfolio objective as defined by risks. Without a plan, we will be unprepared for volatility and our clients and their portfolio will react poorly when the asset inevitably changes in value.