Focus Capital Management’s Approach to Risk

This article is excerpted from a letter by Mordechai Yavneh, managing member at Focus Capital Management, based in New York.

Risk and risk management is fundamental to business in general and investing in particular, and with the heightened volatility and uncertain future due to COVID-19, risk management is something many investors are thinking about at the moment. But risk management is not something that an investor can afford to start thinking about when things start to go wrong. Risk management needs to be baked into the investment process from the very beginning, and at Focus Capital Management that is precisely what we do.

Although risk can be dissected and viewed in many different ways, there are essentially two competing worldviews that underpin how to view and assess risk and how to control and manage risk. In this Strategy Paper, I will discuss how we at Focus Capital Management define risk, how we try to minimize risk, and why we approach risk in this way.

Understanding our approach to risk begins with understanding the essence of our investment philosophy. At Focus Capital Management, we are long-term value investors. As value investors, we believe that there are companies which are undervalued and companies which are overvalued. The market price at any point in time is not proof as to intrinsic worth; markets are not fully efficient. As long-term investors, we understand that it can take time for our assessment of intrinsic worth to be recognized by the market and that in the meantime the stock can remain undervalued or become even more deeply undervalued. This bedrock foundation of long-term value investing informs and guides every step of our investment process – especially our definition of risk and our approach to dealing with it.

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