Maverick Risk

It is human to want to win and we are pre-programmed as children to get what we want quickly. Then we become adults in need of good investment returns and we are forced to operate in longer time frames of five to 10 years. Only mavericks want to do what is needed.

As contrarians running a large-cap value strategy, our stock-picking discipline is organized around taking regular maverick risk on companies that meet our eight criteria and are being shunned by investors for whatever reasons that preoccupy them today. We like to think in terms of the warts or blemishes which the market considers permanent among companies suffering from temporary setbacks.

Another investment veteran, Rob Arnott of Research Affiliates, defined this type of risk-taking in an interview with Barron’s:

“One of the things I find very interesting is an investor’s tolerance for maverick risk. Let’s say the stock market’s up 20%. And you’re invested in emerging markets, and they go nowhere. How distressed will you be at that opportunity cost? If you’re like most investors, you pay close attention to what happens to U.S. stocks and bonds, and not much attention to anything else. If that’s so, then chances are pretty good that you won’t have a lot of tolerance for maverick risk, or performance dissimilar to the markets that you’re focused on. If you’re willing to tolerate results that are very different from your next-door neighbor or your peers, then you can make bigger bets.”

Arnott has made a successful career out of providing asset allocators inexpensive ways to obtain factors that can contribute to outperformance. In theory, maverick risk comes from how much your portfolio deviates and your willingness to look extremely foolish for an extended time period. It is measured by what is called

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