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Excess Returns: A comparative study of the methods of the world's greatest investors by Frederik Vanhaverbeke

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CHAPTER J

RISK MANAGEMENT

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these.”

WARREN BUFFETT, 1996 LETTER TO THE SHAREHOLDERS OF BERKSHIRE HATHAWAY

ALL INVESTORS HAVE to manage their risk exposure if they want to survive in the market. According to conventional wisdom, risk management means making a trade-off between risk and return. High returns are supposedly only achieved by taking on higher risk and people who want to sleep well at night would have to settle with low returns. The academic view on risk is very similar. In addition, proponents of the efficient market theory actually believe that the concept ...

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