If you have to ask most people what one of the riskiest professions is, it is likely being a soldier. The downside is huge death. The uncertainty of any battle situation is extremely high. No amount of planning can truly address the uncertainty and dynamic situations associated with battlefield situations. This uncertainty and risk is why training and risk management are critical for the armed forces.
The US Marines warrant officer risk management training manual has four main principles that provide a framework for any risk discussion. These are consistent with any analysis necessary for a trade or portfolio decision. First, take risks, but not too much, or risks that cannot be measured. Second, always think of risk in the context of return. You have to be paid for taking risks. Third, risks should be undertaken at the right level. For example, if you are worried about portfolio risks, start by discussing position sizing. Fourth, do your homework to understand the risks that will be taken. Do your research.
Principles of RM
- Accept no unnecessary risk
- Accept risk when benefits outweigh cost
- Make risk decisions at the right level
- Anticipate and manage risk by planning
If you are going to be regimented about using risk management principles, you will need a disciplined process. The military loves process and acronyms, so the Marines have BAMCIS. Nonetheless, the process will give the decision-maker an edge. Repetition will reduce mistakes.
BAMCIS and RM
Risk management is identifying and controlling hazards to conserve combat power and resources. The five steps of risk management are:
- Identify hazards
- Assess hazards to determine risk
- Develop controls and make risk decisions
- Implement controls
- Supervise and evaluate
The five-step process is integrated into the decision-making process (BAMCIS)
- Begin planning
- Arrange for reconnaissance
- Make reconnaissance
- Complete the plan
- Issue the order
- Supervise
Risk management principles are universal and fit various situations and professions. There is nothing special about risk management in asset management. The words and terms may differ, but the process is the same. What is critical is following the process. Mistakes will be made, but process-driven decision-making will allow for effective evaluation and the certainty that the process was not the problem.