Thursday, November 24, 2011

It's Not Rocket Science: Part III

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

This section is about risk. Bradley argues that risk and volatility are not one in the same, particularly over long periods. While volatility over the short-term can be hard for people to stomach, it can actually provide opportunities to buy at good prices. In the long-term, volatility often pays off in the form of higher returns.

Bradley also argues against the so-called "lower risk" attributes of securities with principal protection. While such securities may offer lower downside risk in the short-term, the cost of these over the long-term is too high. Over many years, the downside risk of equities is also low, but equities have far more upside. When looked at in this manner, the downside protection of securities with principal protection comes at a potentially high cost over the long term.

One risk that is not emphasized enough, in Bradley's opinion, is the risk of paying too much. Investors fret about equity risk and credit risk, but should focus more on whether they are getting a fair price.

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