The shape of risk

Talaria Co-CIO Hugh Selby-Smith’s latest opinion piece for Investor Daily centres on how the team at Talaria think about risk as volatility, especially as it relates to the current state of equity markets.

As Hugh says: “There are countless books on financial theory that explore the idea of risk as volatility. This academic concept has real world implications and it is a common enough experience that nauseating swings in asset pricing can drive an investor to sell at the worst possible time.

“But a more useful way to think about risk is as the chance of permanent loss, whereby taking on more risk increases the chance of loss, while cutting risk reduces the chance.  Of course, there are times when increasing risk makes sense because the potential reward sufficiently outweighs the potential loss. But there are a number of risk factors to consider before making this decision.

“When thinking about the shape of risk, it is important to consider sentiment, positioning, and valuation. Sentiment is how investors feel; positioning is what they own; and valuation is what they pay for a unit of earnings.”

Read the full article here