David Martin’s Risk and the Smart Investor (davidxmartin.com) offers one of those rare opportunities where you can get the right viewpoint into the right subject at exactly the right moment.
Listening to the Chief Risk Officer of Alliance Bernstein talk about risk as we are coming out of the financial crisis is like listening to Steve Jobs on computers in 1980. You’re getting the right point of view on a subject that has suddenly and irrevocably moved to a dominant position in the business world. Risk, particularly systemic, is the critical issue of the past 5 years and likely the next 10.
What I appreciated about this book was the vantage point. Listening to how Citigroup viewed its risk profile prior to the crisis is fascinating. And how they slowly removed his risk controls over time. Disclosure point: my former boss, Prince Waleed, was the largest shareholder of Citi and I was sitting down the hall when he and Sandy Weill decided to fire Chuck Prince. Certainly a lot of people today wish they had known about David selling his Citi shares after learning Citi more or less abandoned many risk methods.
My other big take-away from this book was the checklist he used to evaluate hedge funds which is an interesting mix of process and people issues. Transparency and reporting but also credentials and reputation. This is an interesting contrast to the usual assumption that risk is about modeling, as opposed to people and processes. And the persistence and consistency required makes it as much about psychology as anything else.
While reading this, I promptly flagged several of the checklists and loaded them into my Blackberry and screensavers. The hope is that I will get into a more regular habit of checking this against my investments and operations. This is one of those books you should integrate into your daily habits.