Decode, don't dodge risk

"When I joined the investment management industry at the tail end of the 1960s, everyone talked about returns, but few people talked about risk-adjusted returns or the idea that risk matters." This candid observation from Howard Marks, Co-founder of Oaktree Capital Management, reminds us of a crucial oversight many investors still make today. Risk is often relegated to the background while chasing the siren call of high returns. On the other end is complete avoidance of it. However, Marks has many lessons to offer on how to avoid both extremes. It's done by "intelligently bearing risk", where higher risk does not necessarily mean higher returns and where a crucial distinction between risk management and avoidance finds recognition. He spoke about these nuances in a recent video lecture. We've distilled select excerpts from the thought-provoking discussion, but to fully appreciate his insights, we suggest you watch the complete video here: https://tinyurl.com/33p3hhn8 What is risk? "Risk, in my opinion, is the ultimate test of an investor's skill. The return alone doesn't tell you how good a job the manager did. The key question is: you see the return, but how much risk did the manager bear to get that return?... Nobody should have to beat the market when it does well. But if you can do that and, at the same time, be ready to decline less when the market has its spells, I think that's accomplishing something very important." What other forms of risk should investors consider? "The possibility of loss is not the only form of risk. The risk of missing opportunities is another important risk. In other words, if you think about it, the risk of not taking enough risk. I think one of the key risks in investing is the chance of being forced out at the bottom. Which is a bigger mis

This article was originally published on November 07, 2024.