Real Versus Perceived Risks

Kopernik views risk as the possibility of a permanent loss of purchasing power. We manage risk by understanding the companies we own, paying less than our estimate of intrinsic value, and actively managing a well-diversified portfolio.

Kopernik assesses risk in a portfolio context and uses diversification as a risk mitigation tool. A security with downside possibilities and large upside potential can be risky as a single holding. When held in a well-diversified portfolio, however, overall risk is diminished substantially. Please see portfolio guidelines discussed above.

Commonly used risk metrics, such as Value at Risk (VAR), do not play a role in Kopernik’s risk management process. We believe measuring risk via tracking error is business model and career risk, but is not risky for an individual portfolio, and that low tracking error can actually be risky when the benchmark itself is overpriced.

Suddenly-rising volatility that may temporarily reduce the value of a portfolio does not pose a threat to the permanent loss of purchasing power unless the underlying intrinsic value of the businesses owned in the portfolio have been permanently diminished as a result. We seek to capitalize on the fact that what is ‘risky’ to short-term investors may not be ‘risky’ to long-term investors. Volatility is risky to those with a short-term time horizon, not to those with a longer horizon. Low liquidity is risky for those who need immediate access to their capital.

In summary, we view the importance of our consistent investment process, our disciplined sell decision process and our adherence to the value style as a distinctive way of managing risk.