DIMITRI TRIANTAFYLLIDES, CFA
Dimitri has over 25 years of experience in both debt and equity security analysis. He has analyzed all parts of the capital structure, including equities, bonds, convertible bonds, bank debt and credit default swaps. He has performed private company valuations since 2011. In 2008 he founded Sixty Guilders Management; a research, advisory, and valuation firm. Prior to this, he was a fixed income sell side analyst with Wachovia Capital Markets (now Wells Fargo). He started his career as an equity analyst for Interstate/Johnson, a Southeast-focused broker-dealer. He has held the Chartered Financial Analyst designation since 1996. He earned a Bachelor of Science in Business Administration from Oregon State University in 1987 and a Master’s in Business Administration from the University of North Carolina at Charlotte in 1993. Since 2009, he has been a board member of the University of North Carolina at Charlotte (UNCC) Investment Fund and is currently serving as Vice Chairman.
Having spent more than 25 years valuing securities, we have come to believe that one of the hardest financial concepts for people to understand is that of risk. The reason for this, we believe, is that humans intuitively understand only half of "risk". That half is the concept of potential loss. For example, in a betting wager with say 5 to 1 odds, we understand that our downside is 1.
The second part of risk, the probability of loss, is a lot harder to conceptualize. In the prior example, if the probability of loss is 80%, then the betting wager is a fair wager - a 20% chance at earning 5x our wager equals our wager of 1 (5*20%=1). Therefore the risk of loss is 80% (100%-20%). Of course the bookies would never offer such betting odds if the probability of loss was that low.
This concept, when applied to financial assets gets clouded even more, given the multiple potential outcomes (not simply a "win or lose" scenario). What's even worse. judgement is often clouded by "past performance". For example, three fair coin tosses in a row ending up heads could lead some to expect a higher than 50/50 probability that the next toss will also be heads - a mistake.
When analyzing securities, and even private companies, we are very sensitive to understanding the risks involved, and developing probabilities for potential outcomes. As a result, we are always asking ourselves "at what cost and what likelihood could a certain number of alternative scenarios play out?". Putting that in practical terms, we often find that financial markets overpay for future return potential at the expense of current cash flows. We too are optimists at heart, but we seek to temper our enthusiasm for the sake of prudence.