‘Risk and the Smart Investor’ is written by David X Martin. Interestingly, the author is a former risk manager of Citibank. The book is available in NLB.
The book provides a risk management framework with anecdotes and a fictional story. It also contains some very practical advice on thinking and acting on risk. Overall, I find the book not bad.
Interesting Points:
a) Risk Management Framework:
i) Assessment
- Know where you are. Assess your current position.
- Know what you do not know. Grasp the limits of your knowledge. Question the assumptions.
ii) The Rules of the Game
- Find out your risk tolerance in relation to your goals
- Demand Transparency. Seek to fully understand the risk. Discuss the risks openly.
- Diversify
- Ensure that checks and balance are in place.
- Risk management never ends.
iii) Decision Making
- Consider all options. Always provide yourself with an exit strategy.
- Ensure that risk is managed in every step of the process
- Reputation is important. Check the reputation of everyone that you are doing business with.
- Incorporate time frames in your decision making. If your investment horizon is two years, your investing strategy should be different from the strategy for a horizon of twenty years.
iv) Re-evaluation
- Constantly review the outcomes. If you are uncertain, ask.
- Identify and learn from your mistakes.
b) Sell when the bank becomes lax on risk management process. The author sold his Citibank positions, when he learnt that Citi has discarded the use of a certain risk management program.
c) Successful risk management means that one needs not make any decision at the heat of the moment when lightning strikes.
d) For an example of risk management, Ford borrowed $23 billion before the financial crisis begun. Call it ‘defensive financing’. A year later, GM and Chrysler filed for bankruptcy and requested for government aid, while Ford remained the sole
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