Understanding Risk: Insights from Howard Marks
Howard Marks, Co-Chairman and Co-Founder of Oaktree Capital Management, has a unique perspective on risk. In his new video series, "How to Think About Risk", he delves into the concept of risk and how investors should navigate it. He asserts that risk is not just about volatility.
Deconstructing Risk: Not Just Volatility
A key point from Marks' series is that risk and volatility are not synonymous. Many investors and academics have been conditioned to equate volatility—the fluctuating stock prices—with risk. However, Marks disputes this, stating that volatility is merely a part of the risk picture. The real risk lies in the probability of losing money. Therefore, investors should focus on managing potential losses rather than avoiding every price fluctuation.
The Power of Asymmetry: Maximizing Gains, Minimizing Losses
Marks introduces the concept of asymmetric investing. This strategy involves structuring investments in a way that the potential gains significantly outweigh the potential losses. The goal is not to completely avoid risk, which is impossible, but to take calculated risks where the potential rewards justify the risks involved. This approach to risk-taking can lead to long-term success.
Risk Cannot Be Quantified, and That's Alright
Risk is unpredictable and cannot be measured in advance. Even after an investment has been made, it may not be clear how risky it was. An investment may have been successful, but that doesn't mean it was not risky. It could be that luck played a part. Marks advises investors to use their judgment and understand that past data may not always predict future outcomes.
The Unspoken Risks
Risk is not just about losing money. Marks highlights other risks that are often overlooked, such as missing out on potential gains by being overly cautious or being forced to sell investments during a market crash. Both scenarios can be detrimental to long-term portfolio growth. He emphasizes the need for a balanced approach to risk and reward.
The Unpredictability of the Future
Drawing on the thoughts of Peter Bernstein and others, Marks explains that the root of all risk lies in our inability to predict the future. Despite our best efforts, there will always be unexpected events that can significantly impact investments. His advice? Be prepared for anything and manage your portfolio with the knowledge of what you don't know.
The Deceptive Nature of Risk
Risk can be deceptive. When the market appears to be at its safest, it can actually be at its riskiest. This is because when things are going well, people tend to take more risks, potentially leading to market bubbles and crashes. Conversely, when things appear risky, it might be a good time to invest. The key lesson here is not to become complacent when the market seems calm.
Price Over Quality
Marks dispels the myth that high-quality assets are always safe and low-quality assets are always risky. The price you pay for an asset is key. Even the best company can be a risky investment if you overpay for it. Conversely, a low-quality asset can be a great investment if purchased at the right price. The focus should be on value rather than simply the quality of the company.
Risk and Return: Not Always Proportional
The saying "high risk, high reward" is not always true. A riskier investment does not guarantee better returns. In fact, excessive risk can lead to significant losses. Investors should be cautious about chasing returns without fully understanding the associated risks.
Risk Management: The Key to Successful Investing
Marks clarifies that risk is an inherent part of investing. While it cannot be completely avoided, it can be managed. This involves continuously evaluating portfolio risks, preparing for unexpected events, and focusing on asymmetric opportunities where the potential upside outweighs the downside.
Bottom Line
Former Secretary of the Treasury, Robert Rubin's approach to decision making, which emphasizes the importance of weighing probabilities and embracing uncertainty, can be applied to risk management. This approach can reduce risk and promote honest decision making. The 15-Risk Management Rules followed by the author are an example of how to develop a risk management strategy.
The key takeaway is not to fear risk, but to understand, manage, and leverage it to your advantage. So, what are your thoughts on Howard Marks' approach to risk? Share this article with your friends and let us know your thoughts. Don't forget to sign up for the Daily Briefing, every day at 6pm.
Understanding Risk: Insights from Howard Marks
Howard Marks, Co-Chairman and Co-Founder of Oaktree Capital Management, has a unique perspective on risk. In his new video series, "How to Think About Risk", he delves into the concept of risk and how investors should navigate it. He asserts that risk is not just about volatility.
Deconstructing Risk: Not Just Volatility
A key point from Marks' series is that risk and volatility are not synonymous. Many investors and academics have been conditioned to equate volatility—the fluctuating stock prices—with risk. However, Marks disputes this, stating that volatility is merely a part of the risk picture. The real risk lies in the probability of losing money. Therefore, investors should focus on managing potential losses rather than avoiding every price fluctuation.
The Power of Asymmetry: Maximizing Gains, Minimizing Losses
Marks introduces the concept of asymmetric investing. This strategy involves structuring investments in a way that the potential gains significantly outweigh the potential losses. The goal is not to completely avoid risk, which is impossible, but to take calculated risks where the potential rewards justify the risks involved. This approach to risk-taking can lead to long-term success.
Risk Cannot Be Quantified, and That's Alright
Risk is unpredictable and cannot be measured in advance. Even after an investment has been made, it may not be clear how risky it was. An investment may have been successful, but that doesn't mean it was not risky. It could be that luck played a part. Marks advises investors to use their judgment and understand that past data may not always predict future outcomes.
The Unspoken Risks
Risk is not just about losing money. Marks highlights other risks that are often overlooked, such as missing out on potential gains by being overly cautious or being forced to sell investments during a market crash. Both scenarios can be detrimental to long-term portfolio growth. He emphasizes the need for a balanced approach to risk and reward.
The Unpredictability of the Future
Drawing on the thoughts of Peter Bernstein and others, Marks explains that the root of all risk lies in our inability to predict the future. Despite our best efforts, there will always be unexpected events that can significantly impact investments. His advice? Be prepared for anything and manage your portfolio with the knowledge of what you don't know.
The Deceptive Nature of Risk
Risk can be deceptive. When the market appears to be at its safest, it can actually be at its riskiest. This is because when things are going well, people tend to take more risks, potentially leading to market bubbles and crashes. Conversely, when things appear risky, it might be a good time to invest. The key lesson here is not to become complacent when the market seems calm.
Price Over Quality
Marks dispels the myth that high-quality assets are always safe and low-quality assets are always risky. The price you pay for an asset is key. Even the best company can be a risky investment if you overpay for it. Conversely, a low-quality asset can be a great investment if purchased at the right price. The focus should be on value rather than simply the quality of the company.
Risk and Return: Not Always Proportional
The saying "high risk, high reward" is not always true. A riskier investment does not guarantee better returns. In fact, excessive risk can lead to significant losses. Investors should be cautious about chasing returns without fully understanding the associated risks.
Risk Management: The Key to Successful Investing
Marks clarifies that risk is an inherent part of investing. While it cannot be completely avoided, it can be managed. This involves continuously evaluating portfolio risks, preparing for unexpected events, and focusing on asymmetric opportunities where the potential upside outweighs the downside.
Bottom Line
Former Secretary of the Treasury, Robert Rubin's approach to decision making, which emphasizes the importance of weighing probabilities and embracing uncertainty, can be applied to risk management. This approach can reduce risk and promote honest decision making. The 15-Risk Management Rules followed by the author are an example of how to develop a risk management strategy.
The key takeaway is not to fear risk, but to understand, manage, and leverage it to your advantage. So, what are your thoughts on Howard Marks' approach to risk? Share this article with your friends and let us know your thoughts. Don't forget to sign up for the Daily Briefing, every day at 6pm.
