Karen Firestone on Taking the Right Risks


Karen Firestone

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Karen Firestone, CEO, and co-founder of Aureus Asset Management, has spent her career in the investment industry, including time working with Peter Lynch on the Magellan Fund at Fidelity. She considers the people selecting stocks and managing money to be “professional risk-takers,” but she also thinks that we are all “daily risk-takers.” These risks are undertaken through activities including everything from driving our cars to selecting our meals.

Are some risks too complex to ponder? Are others too simple to capture our attention? Or, are we untrained in how to truly evaluate risk and come up with a plan to manage it? Firestone considers these questions in her book, Even the Odds: Sensible Risk Taking in Business, Investing, and Life. She notes that we all have different levels of risk tolerance, but we can improve the odds of arriving at our optimal outcome by approaching risk in a thoughtful, structured way.

At the 69th CFA Institute Annual Conference in Montréal, Firestone elaborated on her four overarching tenets of sensible risk taking:

  • Right Sizing: Examine whether the size of the risk fits the situation.
  • Right Timing: Note that the risk changes based on when the action is taken.
  • Relying on Knowledge and Experience: Consider what skills, honed through a career or continuous practice, can be applied to reduce risks.
  • Remaining Skeptical of Promises and Projections: Ponder whether obvious questions have been raised and whether enough time has been taken to arrive at a conclusion.

If these four tenets cannot be applied to reduce a decision’s risks to meet an individual’s risk tolerance, then walking away may be the best option.

Firestone also pointed out that a different perspective can understand the risks involved in a decision. As an example, she recounted a chance meeting with advice columnist Ann Landers. Firestone was expecting a second set of twins, and Landers quickly identified the key risk involved: Firestone giving up her job and blaming everyone around her for ruining her career and her life. As a result of the discussion, Firestone realized that she could address her risks by hiring enough help to be home and be present when needed.

Identifying the right timing to reduce risks can be especially important to investment professionals. However, Firestone said that few investment professionals have an innate sense of risk timing. She cited Peter Lynch, whose management of the Fidelity Magellan Fund achieved an annual average return of 29%, as someone who was successfully able to mitigate risks through skilled timing. Firestone noted that investment managers who are not as skilled as Lynch can still improve their decisions by applying all four tenets when weighing both large and small risks.

Firestone’s talk led to the inevitable fintech question from the audience: Should a computer-run program objectively assess risk for us? Firestone herself is skeptical of optimization models, since no model will be able to take everything into account that is out there. From her own experience, Firestone recalled how the brightest experts from Fannie Mae promised investment returns, asserting that they had taken into account all risks. There are some events that computer programs may be unable to forecast.

Firestone was then asked about the biggest risk that she faces at work. Her main concern is whether market returns will remain low in the years ahead. Ultimately, there will be a few risks that we are unable to control.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo courtesy of W. Scott Mitchell

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One Response to Karen Firestone on Taking the Right Risks

  1. Clement Gavi says:

    ‘The four overarching tenets of sensible risk taking’ mentioned are interesting as they see risk not as a figure of adversity instead as a figure of atlerity that does not prevent concrete action in allowing informed action.

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