The Absolute Return Letter - December 2010: The Dirty Dozen
In the world of finance, risk is essentially the probability of an investment’s actual return being different from the expected return. As most of us are not overly concerned about actual returns being higher than expected, it is fair to say that in practical terms, risk is a measure of the probability of losing some or all of your investment.
Now, risk cannot always be quantified, and there is indeed a term for immeasurable risk. It is called uncertainty. Good investment management is founded on robust risk management or, as we ought to label it, the ability to manage uncertainty well. Many moons ago, a good friend with more grey hair than myself gave me the advice to focus on the management of uncertainty. His philosophy was that if you manage that well, over time, performance will take care of itself.
Now, I must confess that over time I have made my fair share of mistakes. Managing risk/uncertainty is a heck of a lot more difficult in practice than the mathematicians want us to believe. I am only human. I get carried away from time to time like most other investors. Unless you were born with the DNA of Warren Buffett, keeping emotions at bay when making investment decisions is far from easy.
- Howard Marks On The Balance Between Offense And Defense
From The Most Important Thing: A conscious balance must be struck between striving for return and limiting risk— between offense and defense. In fixed income, where I got my start as a portfolio manager, returns are limited and the manager’s greatest...
- Target Risk, Not Return
From Seth Klarman, via Margin of Safety:Targeting investment returns leads investors to focus on upside potential rather than on downside risk....Rather than targeting a desired rate of return, even an eminently reasonable one, investors should target...
- John Mauldin: Uncertainty And Risk In The Suicide Pool
For the past 80 years, we have created ever more sophisticated models of risk in the economic and investment worlds. With each new tool we create to measure risk, we seem to think we have somehow gained more control over our future. Paradoxically, we...
- Introduction To "expected Returns: An Investor's Guide To Harvesting Market Rewards" - By Antti Ilmanen
Health warning: We should humbly recognize the limits of our understanding. Realized returns are dominated by randomness, structural uncertainty, and rare events. Expected returns are unobservable, at best estimated with noise. We should resist hindsight...
- Whitney Tilson: Investors Will Miss Out If They Confuse Uncertainty With Risk
Dealing with uncertainty is always a key challenge for investors. But dealing with uncertainty doesn’t mean avoiding it – on the contrary, it is often fuzziness about a company’s future that creates the type of opportunity bargain-hunting investors...