Risk is just not just an issue of volatility. In his latest video series, Howard Marks – co-chairman and co-founder of Oaktree Capital Management — delves into the intricacies of risk management and the way investors should take into consideration risk. Marks stresses the importance of understanding risk because the probability of loss and mastering the art of asymmetric risk-taking, where the potential for gain outweighs the potential for loss.
Below, we summarize the important thing insights from Marks’ series using our artificial intelligence (AI) tools to assist investors sharpen their risk management.
Risk and volatility usually are not synonyms
One of Marks’ central arguments is that risk is usually misunderstood. Many academic models, particularly those from the University of Chicago within the Nineteen Sixties, defined risk as volatility since it was easily quantifiable. However, Marks argues that this is just not the true measure of risk. Instead… Volatility generally is a symptom of risk, but is just not synonymous with it. Investors should deal with potential losses and the best way to mitigate them, not only price fluctuations.
Asymmetry in investing is vital
A significant theme in Mark’s philosophy is the power to capture profits during upswings and minimize losses during downturns. Marks calls this “asymmetry.” This concept is critical for many who wish to outperform the market over the long run without taking up excessive risk.
The risk can’t be quantified
Marks explains that the long run is inherently uncertain. In fact, even when the consequence of an investment is thought, it might be difficult to find out whether that investment was dangerous. For example, a profitable investment might need been extremely dangerous and the success could simply be attributed to luck. Therefore, it’s important to grasp the underlying aspects that influence the chance profile of an investment fairly than simply specializing in historical data.
There are many kinds of risks
While the chance of loss is crucial, there may be also the chance of missed opportunities, under-risking and the danger of getting to exit investments at the underside. Marks stresses that investors should concentrate on the potential risks not only when it comes to losses but in addition when it comes to missed upside. In addition, considered one of the largest risks is being forced out of the market during downturns, which might result in missing the eventual recovery.
The risk lies in ignorance of the long run
Drawing from Peter Bernstein and philosopher GK ChestertonMarks emphasizes the unpredictability of the long run. This implies that while investors can anticipate a variety of possible outcomes, they have to bear in mind that unknown variables can shift the expected range. Marks also mentions the concept of “tail events,” where rare and extreme events – similar to financial crises – can have a disproportionate impact on investments.
The perversity of risk
Risks are sometimes . To illustrate this point, Marks shared an example of how removing traffic signs in a Dutch city paradoxically reduced the variety of accidents because drivers became more cautious. It’s similar with investing: when markets appear protected, people are inclined to take greater risks, often resulting in negative outcomes. , because overconfidence can lead investors to make bad decisions, similar to paying an excessive amount of for high-quality assets.
Risk is just not a function of asset quality
Contrary to popular belief, high-quality assets can turn into dangerous if their prices rise to unsustainable levels, while low-quality assets may be protected if their price is low enough. Marks emphasizes that . Successful investing depends less on finding the very best corporations and more on paying the precise price for any asset, even whether it is of lower quality.
Risk and return usually are not at all times correlated
Marks challenges the traditional wisdom that higher risk results in higher rewards. Rather, it’s the perception of upper rewards that motivates investors to take risks, but there is no such thing as a guarantee that those returns shall be achieved. Investors must subsequently be cautious in assuming that higher risk results in higher rewards. It is crucial to weigh up the possible outcomes and assess whether the potential return justifies the chance.
Risks are unavoidable
Marks concludes by reiterating: The key is just not to avoid risk, but to administer and control it intelligently. This means continuously assessing risk, being prepared for unexpected events, and ensuring that the potential advantages outweigh the downside. Investors who understand this and pursue asymmetric strategies will position themselves for long-term success.
Diploma
Howard Marks’ approach to risk emphasizes the importance of understanding risk because the probability of loss fairly than volatility, and managing it through careful judgment and strategic considering. Investors who understand these concepts can’t only minimize their losses during market downturns, but in addition maximize their gains during favorable conditions, thus achieving the coveted asymmetry.
