Like many people during the pandemic, I decided to pick up a new hobby. With basically everything shut down, and the outdoors being one of the only relatively safe spaces available to us, my quest led me to mountain biking. I love it — biking through the foothills surrounding Santa Fe is a blast… but it also involves some risk.
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My first crash left me with some scraped knees; so, I bought myself some knee pads. After my second fall, I went looking for elbow pads. But the guy at the bike shop suggested something seemingly unrelated to protecting myself during a crash — grippy shoes.
This surprised me too; but when he explained the logic to me, it all made sense.
Knee pads and elbow pads are designed to lessen the damage when you fall. Grippy shoes help prevent you from falling in the first place.
You see, grippy shoes have significant traction on their soles, which help prevent your feet from slipping off the pedals. This helps you maintain control when the trail gets bumpy, which in turn helps you avoid a potential crash. The aim is to minimize the chance of falling in the first place, which sounded like music to my ears (and knees and elbows).
Like mountain biking, investing has different approaches to managing risk. A passive index fund holds small positions in many individual stocks. This is like wearing a lot of padding while mountain biking — if you do take a tumble, the damage will be lessened because no one stock can hurt you too much. With this approach, overall stock market performance is your main risk.
Our approach to risk is more like wearing grippy shoes. Within our focused portfolios, we aim to understand a select few investments very well. If an individual stock isn’t performing as planned, we can actively manage the position and control exposure in periods of uncertainty. Individual stock holdings do dictate a large part of our investment outcomes, which is why we maximize exposure where we have the highest conviction. This doesn’t avoid overall market performance risk, but it does change the underlying risk profile for our strategies.
Whether it’s mountain biking or investing, people feel comfortable handling risk in different ways. We invest in a focused portfolio of 20 – 35 stocks, which has more idiosyncratic, stock-specific exposure than other strategies. But much like the mountain biking metaphor, we prefer to not wear a ton of padding that constricts our movement, but rather take active steps to avoid falls.
This approach isn’t for everyone, but it is how we prefer to invest our own money; it might be a good fit for you and your clients as well.
IMPORTANT DISCLOSURES
The views and opinions expressed by individuals are their own and not the views or opinions of their employer. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.