Very often, investors downplay the need to understand risk management when investing. Many tend to focus more on company valuations rather than risk management due to the lack of understanding of the importance of risk management. In many ways, investing is similar to poker. Only if we are able to preserve our capital, would be still be in the game. Hence, having a good understanding of risk management is crucial in investing and in someways even more so than knowing how to value a company.

What is risk?

Firstly, one of the biggest mistakes many investors make would be perceiving risk as the volatility in stock prices, which is expressed as beta in Modern Portfolio Theory. Contrary to popular belief, such volatility is one that value investors should be anticipating, allowing us to purchase stocks at a cheaper price. To us, the real risk should be the risk of permanent loss of ......