Finding My Risky Balance

Chartwell Capital has been over 17 years in the making. Reflecting on how we have weathered numerous economic cycles, I realized that while good insights and a bit of luck helped, it is our commitment to proper risk management that has been critical to our success.

This focus on managing risk shapes everything we do — how we evaluate investments, rebalance portfolios, and assess market sentiment and business trends.

The foundation of our approach lies not in attempting to predict the future with precision, but in understanding and learning how to navigate an uncertain world. The father of value investing, Benjamin Graham, once said, "The essence of investment management is the management of risks, not the management of returns." It took us many lessons to fully appreciate Graham’s wisdom.

In Chartwell's early days, we found a stock that seemed like a perfect investment. It traded at low single-digit multiples, had a strong net cash position, and was growing at mid-teens rates. Their products were solid and the management team seemed credible — the company basically ticked every box and it quickly became our single largest holding.

Then came the unexpected. The company was later exposed for massive financial manipulation. No amount of due diligence could have uncovered the truth, as even the management team was unaware of it. It turned out the majority owner and his inner circle had secretly inflated orders through fraudulent dealings. The stock plummeted 90% when trading resumed months later.

That humbling experience taught us an important lesson about risk: "It isn’t what you don’t know that kills you — it’s what you know for sure that isn’t so."

In another instance, we found a high-quality stock that combined growth and value characteristics. Having learned from past mistakes, we built a modest position size. Months later, the market recognized the stock's potential, driving its price up twofold. With strong market momentum and investor enthusiasm, we maintained our conviction and believed that the stock could easily double again.

But when the market shifted, the stock began to slide. Initially, we remained complacent. Despite losing around 20 percent from its peak, we still had a profit buffer of 80 percent. The stock later dropped another 20 percent, and we did not react, wishfully anticipating a rebound. Without proper profit protection measures and risk control, we lost all our gains. This experience taught us that risk management is crucial not only for downside protection but also for profit preservation. Perhaps more importantly, it also taught us not to let our egos get in the way.

After all these years, I have observed that all profitable investments are alike; each unprofitable investment, however, is a lesson in its own way. Moreover, investing well is not only about intelligence but also about cultivating the right temperament to optimize risk wisely and maximize returns prudently.

Finance professor Elroy Dimson sums it up perfectly: "Risk means more things can happen than will happen." This highlights a fundamental challenge for the investor: as the future holds infinite possibilities, only one path will unfold. Thus, despite our best efforts to map out scenarios and prepare for probabilities, reality often surprises us.

This persistent "expectation gap" cautions us that true risk management goes beyond mathematical models. It requires acknowledging our limitations and staying prepared for the unexpected.

At Chartwell Capital, we’ve learned that successful investing is as much about how we invest as it is about what we invest in. Decisions about position sizing, downside protection, and rebalancing are just as critical as identifying the right opportunities.

Some may focus solely on maximizing returns, but we’ve found that avoiding catastrophic losses is far more important. It’s this risk-first mindset that has allowed us to endure and thrive through the ups and downs of the last 17 years.

As we look ahead, we remain committed to navigating uncertainty with the discipline and humility these experiences have taught us.