Here’s a great excerpt from Michael Burry’s 2001 Scion Capital Shareholder Letter in which he discusses the best way for investors to minimize risk saying:
Although an outsider might think the goal of prevailing modern investment practice to be one of mediocrity, there in fact remains much more competition to achieve gains in the market than there is competition to record losses. Laissez-faire security analysis paired to an entirely misdirected view of risk management nevertheless dooms most institutional portfolios to mediocre performance.
In fact, traditional risk management – centered on minimizing volatility in various forms – relies on theories that assume security analysis is a rather fruitless effort, courtesy of efficient markets. There is a great paradox in this line of thinking that should warn investors away from all portfolio managers that employ it. The correct view remains that risk is minimized not through the alchemy of volatility calculus but rather through respectful business evaluation.
Respectful business evaluation in turn requires respect for the boundaries of one’s fund of knowledge, however dynamic the boundaries may be. Venturing cash-first into unfamiliar territory nearly always results in either losses appropriate for the bonehead move or successes borne of dumb luck. Be assured that neither do I employ dumb luck as an input into my investment process nor do I count on its sudden appearance by my side. Risk management need not be more complicated than this.
You can read some of Michael Burry’s letters here – Scion Capital Shareholder Letters.
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