HOW WE INVEST | RISK MANAGEMENT
Risk management is at the forefront of our portfolio management and is best summarized as being humble about the inherent uncertainty of the future, while trying to be fearful when others are greedy and vice versa. While we may have conviction about an investment theme, we will not take on what we believe to be irresponsible or unreasonable risk, so as to limit the loss of capital in the event we are wrong.
We pay a lot of attention to both valuation and durability of the business when we make an investment, which we believe helps to limit downside risk. We sell a stock when the price rises to a level that in our estimation exceeds the potential long-term risk-reward or when the fundamentals of a company deteriorate but are not reflected by a commensurate adjustment in the price. Often, rather than selling an entire position, we may simply reduce the position if we believe the shares still offer a positive but potentially smaller risk-reward. There are certain metrics or characteristics of a company or security that tend to augur poor performance, and we monitor all of our holdings for these. Finally, we limit sector and individual security weightings and employ multiple downside risk models.