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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 Cullen Roche for the Montier paper.

Smacking the Home Run: Fat Right Tails

A good reminder:

Opalesque: You have some winning trades, some losing trades, how do you know you’ll come out ahead?

Trend follower Ken Tropin: In this business you need to have ample payoffs from your winning trades but make sure your losing trades do not generate big losses—so the returns have a fat right tail but not much left tail! Suppose over time you make money on half your trades and lose money on the other half. If the winning trades are double the size of the losing trades, then you have a pretty profitable investment.

Source. More on Kenneth Tropin here.

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