Value at Risk (VaR). Defense-Adjusted Value Over Average (DVOA). Solvency Capital Requirements (SCR). Yards after Catch (YAC). Defense-adjusted Points Above Replacement (DPAR).
As I bone up on Solvency II for a new “research stream,” apply risk-management techniques to my personal portfolio in response to a bit of macroeconomic volatility and prepare my fantasy football drafting strategies, I feel a bit overwhelmed. Based on the discussions I’ve had with CFOs and risk officers in the past 12 months or so, my sense is that I’m not alone.
I have too many metrics and not enough analysis when it comes to managing risk in my investment portfolios and my fantasy football leagues.
How much decision-making weight do I assign to a company’s current P/E ratio, a mutual fund’s expense ratio or recent inflation increases in Turkey (regarding that Turkey ETF fund that dropped 25 percent for no good reason this past week)?
To what extent should Philadelphia Eagles wide receiver Jeremy Maclin’s mysterious off-season weight loss influence my instinct that he’s going to have a much more productive season than fellow pass-catcher DeSean Jackson (because Maclin is a bargain-buy based on what the fantasy football market currently thinks of his value)? And how much should I take into account the Eagles strength of schedule (yet another metrics, albeit a slippery one)?
Metrics are wonderful; they bring clarity to specific situations. The problem is that there are so many of them that metrics (i.e., trees) can obscure the view of the big picture (i.e., the forest).
I need more analysis: straightforward, not-too-complex assessments I can use to make – and own – decisions with confidence. Like I said, I don’t think I’m alone.
“Over the past few decades, organizations have grown increasingly rich with risk data, their volume or quality of risk analysis often remains low,” reads an article in a Protiviti newsletter targeted to financial services companies.
The article notes that board members also suffer from too much data – much of it in the form of metrics – and too little information. The solution, according to the article, is a so-called “risk index,” customized to an organization’s unique qualities and designed to answer two big questions with confidence:
As I tackle my own risk-management processes – those that are more important as well as those that provide more immediate and pleasurable returns – I’m going to start with those big-picture questions.
