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Value Investing: Tools and Techniques for Intelligent Investment by James Montier

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Chapter 11. Clear and Present Danger: The Trinity of Risk[11]

  • Value investing is the only investment approach (of which I am aware) that truly puts risk management at the very heart of the process. Ben Graham was deeply critical of modern finance's obsession with standard deviation (and I'm sure he would have laughed out loud at VaR). He argued that investors should concentrate on the dangers of 'permanent loss of capital.'

  • Graham went on to suggest at least three broad risks that could result in such a loss. We have termed these: valuation risk, business/earnings risk, and balance sheet/financial risk. Valuation risk is perhaps the most obvious of our trinity. Buying an asset that is expensive means that you are reliant upon all the good news being delivered (and then some). There is no margin of safety in such stocks.

  • Some markets display more valuation risk than others. For instance, the UK market is trading on ...

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