VIDEO, (2:46) Recorded July 2011

WILL MCKENNA: How do you prepare for the unforeseen — and, in some ways, the unforeseeable — events that occur in the world and have impacts on you as an investor?

DAVID RILEY: At the beginning of every year or the end of the year, you can think about, well, what could surprise us next year? What could be the big events next year? And we just don’t know. I mean, we don’t have a crystal ball, so we cannot forecast what’s going to happen.

I think if you went back to the beginning of last year, no one internally was forecasting, “Oh, we’re going to have a major problem in Dubai, which will trigger a major problem in Greece.”

And then this year, I don’t know if there was anyone internally who would have said, “Oh, we will have a rolling regime change” — rolling political issues across the Middle East — in the way that we’ve seen. And you wouldn’t have predicted the massive earthquake and nuclear catastrophe in Japan. So I think you just never know.

So that, I think, reminds you why you need to be diversified and you shouldn’t be overconfident.

WINNIE KWAN: I think what we are trying to do — and there are certain lessons that we can learn, especially from the 2008 and 2009 episode — is that we need, as an investment organization, to really identify and canvass what we call the fat-tail risk: i.e., some of the scenarios that are least discussed, that could stand up as something that’s going to really hurt our portfolios. And then, how that translates into our portfolio and what does it mean and what should we do in order to think about how to mitigate that risk. I think if we can do a better job during this period of time, that is going to be really helpful.

The one thing that I know is that when something is very much talked about, usually it’s already not going to be surprising. And so right now, everyone is talking about the demise of the U.S. dollar, and that certainly can be the case. But usually, when you can see [that] everyone is writing about it, that probably marks the end of the U.S.-dollar weakness — at least for the time period.

We do get unparalleled access to management and to central bankers, and we get to talk to a lot of people which our fund holders — or anybody else who’s not in our business — cannot access. And so our job is to really go and look at some lower probability risk that could come up, that could stand up, that is not being discussed. Because those are exactly the kinds of factors that [are] going to be really impacting the markets, really going to hurt us, etc.