Are investors overpaying for safety?

Exploring the gap between overpriced and underpriced assets

While we all worry about risk and deal with it in our everyday lives, it is probably the most important but least understood concept in finance, writes Graeme Forster, portfolio manager at Orbis Investments,

Because it is so hard to pin down and define, we use proxies such as volatility, value at risk, beta or tracking error. These all capture an aspect of risk and are appealing for their simplicity, but they are wholly inadequate when it comes to capturing what we really care about—the risk of losing money. Many more things can happen than will happen. A strategy that carries an exposure to a highly unlikely but catastrophic, outcome may well have a high chance of generating an above-average return in any single year (via the premium it picks up through carrying the risk) but will likely...