In an interview with Advisor Perspectives, value-investing guru Bruce Greenwald talks about lessons learned from the financial crisis. As a result of the crisis, he has refined his process of risk management.
Here are the takeaways:
1. Never overpay for an investment. Having a margin of safety is critically important.
2. You need to have a reasonable amount of diversification, which Greenwald defines as 20-30 globally diversified positions.
3. Beware of leverage. It’s the fastest way to make a temporary impairment of value into a permanent loss of capital. Many value investors got burned because they invested in financial companies with high amounts of leverage.
4. You must take macro risks into account. The best way to do this is to look at the macro-risk exposure of each of your holdings, for example, how would the position perform in an inflationary environment, what about deflationary?