The Trinity of Risk
November 19, 2018

The Trinity of Risk

Evaluating risk at the company level.

In the first of this two part series on risk, David Barr and Felix Narhi take a deep dive into risk assessment at the company level. A primary goal is capital preservation, and this starts with risk assessment. David and Felix discuss the trinity of risk – balance sheet risk, valuation risk and business risk – and discuss their approach to evaluating each of these different types of risk. Understanding role of behavioral psychology in investments and staying within your circle of competence is also key. They also reflect on how their thinking of balance sheet risk has evolved over the years with the growth of the investment team. Tune in to the next episode to find out more about managing risk at the portfolio level.

Key Takeaways

2:34The trinity of risk. What that means and how it relates to what Pender does on the equity side.
5:16Volatility and how it relates to risk - it's both a defensive mechanism and an opportunity to play offence.
6:52The intrinsic value of a business doesn't change on day-to-day basis, it changes over time.
7:59How does Felix view opportunity cost with respect to valuation risk? He uses Starbucks as an example to illustrate his perspective.
13:44The second element in the trinity of risk is balance sheet risk. How is that evaluated at the individual company level?
20:11The growth of the Pender investment team has changed how they look at balance sheet risk. David and Felix discuss some examples of that demonstrate this evolution.
23:29Business risk is where the most mistakes are made - there are lots of dangers out there.
27:19Management is an important component of business risk. How does David assess that element of risk?
30:58Your ability to assess business risk is dependent on your circle of confidence.
36:08Felix reiterates the idea that the better and longer you know the companies you're investing in, the lower the risk.

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