A Value Investor’s Perspective on Tail Risk Protection

You are a value investor? You want to protect against tail risk? Two choices:

James Montier says this.

I say this.

Don’t get me wrong, I like Montier’s behavioral views on markets. There is, however, a better solution to tail risk and it rhymes with …bend wallowing.

Note: Tip to pragcap.com for the Montier paper.

5 thoughts on “A Value Investor’s Perspective on Tail Risk Protection

  1. Mr. Montier’s thoughtful approach still seems to depend on careful quantifying of dubious metrics, based ultimately on very elastic accounting protocols (“fair value,” or earnings, for that matter).
    Then, too, terms like “deflation” (of stock prices, and residential real estate, chiefly), or “inflation” of pretty much everything else, skew any calc’s of various real premium costs that may be chosen to pay for his tail insurance strategies.
    As always with cash, nominal values ain’t buying power.

  2. “central principle of investment is to go contrary to general opinion, on the grounds
    that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.”

    I know if you say the above to a seminar filled with novice investors to the most sophisticated you’ll get a ton of nodding heads and knowing smiles. In that same discussion you’ll hear the speaker say how it is impossible to time the market so stick with it blah blah. So, it makes sense to find things that are broken, but will get better, buy them when all else are selling and then hold them until everyone else comes around to your way of thinking and make a fortune. Simple right. That simply does not work as well as Trend Folloiwng. It sells way better, it doesn’t perform as well, but it appeals to peoples insecuriites and vanities in equal measure. The buy and hold is a built in excuse and the vanity of people’s great insights to recognize values where others cannot plays a big part.

    Why that sells better than – markets tend to trend (for a variety of reasons), there is really no way of knowing when this will happen but when certain clearly defined price behaviors are spotted we jump in. We will ride these trends for all they are worth. We go into each trade with a clearly defined weight and level of loss – while frustrating an inexplicable gives Trend followers there endless edge.

  3. I think most people are baffled because they instinctively look for information and knowledge on which to base their decisions. Trend following is different. It focuses on lack of knowledge as the basis for decision making. This is what Zen calls “Don’t Know” mind. In the eyes of most humans if you don’t know you can’t act. But Zen teaches us that action that’s based on knowledge is always partial.

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