Riskmanagement
Good companion piece to our recent post called “Life without a risk-free benchmark”. It argues that by increasing incentives to invest in supposedly AAA-rated securities, proposed banking and insurance regulations may actually increase systemic risk – and that the US debt debacle is the best example of it.
Just the title of this video in the Financial Times is enough of a brain-teaser. The point is: if you rely excessively in a “risk-free” rate, your models must be going crazy. As the “professor” in the video says, efficient market theory was always shaky ground in which to lay the foundations of any investment, and now it should be clear to everyone that we should question the very existence of something “risk-free”. In fact, there was always this choice.
An interesting article on the legal feud between hedge funds TCI and 3G Capital and rail operator CSX. It’s a good reminder for us to mention that The Deal Professor column at NY Times’ Dealbook is mandatory reading. There’s much more to “risk” than greek letters, and one aspect of risk is knowing precisely what one is getting into – in this case all possible legal ramifications of a given stake.
Bloomberg describes the rise in importance (and salaries + bonuses) of the risk officers in financial institutions. Business Insider took that story to its limit and created a “rock star” profile of many prominent Chief Risk Officers. The question is: are financial institutions safer for it? What “risks” are being “measured”, and how? When even Basel III is being called into question and financial-sector regulation is still open for debate in the US and abroad, what exactly is being achieved? We have delved on the subject before, and still believe that, most of all, “risk comes from not knowing what you’re doing”.
In recent coverage of Brazilian “boom or bust” theme, some of it is well written – that’s the few we have linked to here. While not even local writers get everything right, in other articles getting better sources or digging deeper would have really made those stories better or more balanced. We have been around since 1988 and we still don’t pretend to know which precise direction Brazil is taking at any point in time. We seek to assess major risks and find that, most of the time, conservatism is best served by knowing very well the companies that go through our filters and patiently waiting for opportunities.
John Paulson’s subprime-collapse bet made him a household name (of sorts) and gained him instant “Genius” status. Success brought him fame and scrutiny he probably never asked for. Then all of a sudden Sino Forest comes along and turns the genius into something less, and criticism is fast and harsh. In fact, this post is [...]
Nassim Taleb (with Mark Blyth) has written a very interesting piece for Foreign Affairs called “The Black Swan of Cairo: How Suppressing Volatility Makes the World Less Predictable and More Dangerous” (PDF link here). The strangely radical notion that “to make systems robust, all risks must be visible and out in the open” is almost counter-intuitive and seemingly impractical for today’s leaders, again raising the issue of governance. The “seduction of stability” is real, permeates all aspects of our lives and has to be one of the mental/ behavioral “traps” one has to keep in mind.
Very good event as usual. Jim Chanos was a blast with a presentation on Solar and Wind power, but the highlight so far was the presentation by a student who won the first Ira Sohn Investment Case Contest. The winner presented his long case on Bridgepoint Education, already up 12% on the news. Sure, the [...]
We provide links to the best stories we’ve found on the web about the 2011 Berkshire Hathaway annual meeting. When reading the stories or watching the videos, always remember to keep an open eye to the writer’s biases, experiences, leanings and incentives – as well as to your own, of course. Also keep in mind the relevant subjects discussed in the meeting that just weren’t given enough media because of the Sokol affair, such as the insurance cycle.
Two notes: a strong-worded LEX column about the need for Brazil to “grow up” and face its longer-term, big-picture issues such as lax government spending and poor labor and tax regulations. The other is an Economist article about investors’ growing interest in hedging “tail risk” – Nassim Taleb must have cringed when he read some parts.
