Welcome to our Blog: The Art of Risk Management in Investing
Risk is a concept that often goes hand in hand with investing, but it is not simply a matter of volatility. In a new video series, Howard Marks — Co-Chairman and Co-Founder of Oaktree Capital Management — explores the intricacies of risk management and how investors should approach thinking about risk in the world of investing. Marks emphasizes the importance of understanding risk as the probability of loss and mastering the art of asymmetric risk-taking, where the potential upside outweighs the downside.
With the help of our Artificial Intelligence (AI) tools, we have summarized key lessons from Marks’s series to help investors sharpen their approach to risk and make informed decisions in their investment strategies.
Risk and Volatility Are Not Synonyms
Marks argues that risk is often misunderstood and that volatility is not the same as risk. While many academic models define risk as volatility because it is easily quantifiable, Marks believes that true risk lies in the probability of loss. Investors should focus on mitigating potential losses rather than solely focusing on price fluctuations.
Asymmetry in Investing Is Key
Marks emphasizes the importance of asymmetry in investing, where gains are maximized during market upswings while losses are minimized during downturns. Achieving this asymmetry is crucial for long-term success in the market without taking on excessive risk.
Risk Is Unquantifiable
Marks explains that risk cannot be quantified in advance due to the inherent uncertainty of the future. Investors must rely on judgment and understanding of underlying factors rather than historical data alone.
There Are Many Forms of Risk
Aside from the risk of loss, investors should also consider other forms of risk, such as missed opportunities, taking too little risk, and being forced out of investments at the bottom. Understanding these risks is essential for making strategic investment decisions.
Risk Stems from Ignorance of the Future
Marks highlights the unpredictable nature of the future and how risk arises from our ignorance of what’s to come. Acknowledging the uncertainty of the future is key for investors to anticipate a range of possible outcomes.
The Perversity of Risk
Risk is often counterintuitive and can lead to unexpected outcomes. Marks emphasizes the importance of understanding the paradoxical nature of risk and making informed decisions to mitigate adverse effects.
Risk Is Not a Function of Asset Quality
Risk is not solely dependent on the quality of an asset but is also influenced by the price paid for that asset. Investing success lies in paying the right price for any asset, regardless of its quality.
Risk and Return Are Not Always Correlated
Contrary to popular belief, higher risk does not always guarantee higher returns. Investors must be cautious when assuming that taking on more risk will lead to greater profits and evaluate potential outcomes carefully.
Risk Is Inevitable
Risk is an unavoidable part of investing, but the key is to manage it intelligently through careful assessment and preparation for unexpected events. Investors who understand this can position themselves for long-term success.
Conclusion
Howard Marks’ approach to risk management highlights the importance of understanding risk as the probability of loss and managing it through strategic thinking. By adopting asymmetric strategies, investors can minimize losses and maximize gains, ultimately achieving long-term success in the world of investing.