As active managers, we believe that unexpected market events happen frequently, and that the tails of a normal probability curve don’t accurately account for their likelihood. We also think risk can be managed: Viewed through the lens of the market cycle, wise investors should take less risk when the economy is going to contract, when other investors are overly enthusiastic, and when risk assets are expensive or overvalued. On the other hand, informed investors should take more risk when the economy is expanding, when other investors are overly depressed, and when risk assets are cheap. We believe that short-term market movements (measured in days) are impossible to forecast, but that over the market cycle, we can assign probabilities for both the news and investor response to it; that helps us determine how best to manage risk in our client accounts.

Managing Different Kinds of Risk