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books - business 2008

Upside Downside

Upside Downside

Simple Rules of Risk Management for the Smart Investor

by Ron Dembo and Daniel Stoffman

from the flap… Upside, Downside is a toolkit to protect yourself from financial risk. Co-authored by a leading financial journalist and a pioneer in the field of risk management who advises the world’s major banks, it gives investors access for the first time to the most advanced risk management strategies available, distilled into three simple rules.

I didn’t finish all of this book, but did have a few flags…

pg 15 The successful investor knows how to manage risk. That means making sure that the upside of an investment portfolio is greater than the downside. This can be achieved by following three simple rules:

  1. Know what you own. You can’t manage your risk without a deep understanding of what exactly your portfolio contains and what risks it exposes you to.
  2. Use multiple scenarios, not forecasts. Forecasts attempt to predict the future. But the future is unknowable, which is why forecasts are usually wrong. The risk-savvy investor uses scenarios instead of forecasts. Scenarios allow us to prepare for a variety of possible futures rather than just one.
  3. Anticipate regret. Before buying an investment, try to imagine how much regret you might experience should the investment fail. In this way, you incorporate your own individual financial situation and risk tolerance into the decision-making process.

pg 29 Understanding our liquidity is a key aspect of knowing what we own.  A bond or stock can be sold in a minute or two. A piece of real estate might take months to unload. Everyone has unexpected cash needs occasionally. All investors should know how long it will take to unwind a portfolio, or part of it, if such a need arises.

pg 54 In times of crisis in the international financial markets, there is a flight to US dollars. 

pg 56 The LTCM debacle is stunning proof of the importance of our first rule. Huge institutions and wealthy investors put vast sums into this mysterious operation without knowing what they owned. In fact, they weren’t even allowed to find out.

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