Management Development Institute: Perspectives on Risk

Amit Wadhwaney
Moerus Capital Management LLC

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Moerus Capitals Approach

Long-term value investor (3-5+ year holding period)

Bottom-up (macro-myopic, macro aware)

Very risk averse

Avoidance of business risk at the security level as well as the

portfolio level
Embrace market risk as a source of opportunity

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Security Selection: Valuation

Cheapness: deep discount is of paramount importance

Size of discount is a function of valuation methodology
employed: Not all discounts are equal

Assumptions based upon minimal guesses about future

Methodology that yields bedrock (lower-bound) valuation

Focus on actual balance sheet data, not future earnings

projections
First principle of risk avoidance/mitigation: buy as cheaply as
possible

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Buy Cheaply: Its Not as Simple as it Sounds

First principle of risk avoidance/mitigation: buy as cheaply as

possible
Conceptually reduces price risk
In itself may -- or may not -- provide a margin of safety
Necessary, but alone not sufficient to provide an adequate
margin of safety
Must address other risk factors in addition to buy price

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Security Selection: Risk Considerations

Factors internal to the company

Factors external to the company

Other Considerations

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Generic Sources of Risk: Internal

Balance Sheet

Capital needs recurrent or otherwise

Inept / dishonest management

Inappropriate governance / self-dealing potential for

control groups
Risks stemming from the business model

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Generic Sources of Risk: External

Government involvement official or by suasion

Industry structure

Industry / macro shocks

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Other Considerations

Avoid undue risk aggregation at the portfolio level

Leveraging of portfolio might make longer-term
investing difficult. In contrast, holding cash in the
absence of opportunities is rational & simply good
practice
Make sure your investors have similar objectives to
yours. A mismatch between investors time horizons and
those of portfolio investments can be very disruptive for
long term investing
Know the neighborhood you are going to
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