What is Risk?

Investment risk is the likelihood of occurrence of losses relative to the expected return on any particular investment.

Whenever there is an investment there is a chance that the result will deviate from the intended outcome. Where that deviation is negative there is potential for losses. Risk is generally understood as volatility and is quantified by standard deviation of returns. Standard deviation is used to measure risk, but there are a number of limitations to this approach. One such limitation is the assumption that returns are normally distributed and independent. This makes standard deviation easier to understand, but is often not the case when considering actual returns. Another, more significant issue with using standard deviation as a measure of risk is that the volatility defined by standard deviation considers all volatility as risk, not only negative volatility. This means that standard deviation may not be a significant indicator of potential gains. 

What do we do differently?

At Candeo we take a different approach to volatility. Rather than looking at all volatility as risk, we perceive only negative volatility as a risk. Negative volatility is price movement below the price at which an equity was purchased. This means that as long as returns are positive, volatility will be tolerated. This allows us to weather the "risk" that is not significantly effecting the absolute return of our portfolio, and makes it possible for us to realize the full potential of our valuation system. 

However, not all positive volatility is tolerated. Once an investment has appreciated to a certain target value we may apply a trailing stop to ensure that unrealized gains are not significantly eroded. This allows us to preserve appreciation and if triggered to reinvest proceeds into other companies identified by Candeo's methodology, providing further opportunity for growth. 

How do we control risk?

The first way that we control risk is by only investing in companies with a market capitalization greater than $1 billion. This ensures that the companies we own are established and have a level of resiliency in difficult economic environments. 

We also take three measures to eliminate negative volatility and mitigate risk. First we only purchase companies identified as undervalued by our algorithm. Simply put, Candeo buys equities cheaply relative to cash flows. Second, we purchase a diverse selection of approximately 60 to 200 companies across ten sectors. This limits our exposure to any one company or sector, as each company only accounts for a small portion of the total portfolio. The third way we control negative volatility is through the institution of blackout periods. During blackout periods Candeo tactically reallocates client assets from equities to a portfolio of mixed maturity United States government bonds before moving to cash. Candeo has developed a mathematical indicator to exit the market during significant volatile times. It is during these volatile times that the value of protecting clients' principals can be most significant.