What is Investment Risk?

I was dusting some old news letters and came across one from Seth Klarman (SK), dated 2005, on Risk. I thought to post some very interesting write-up from one of the greatest value investors of all time.

What is Investment Risk? People tend to get confused between Volatility and Risk.

According to Seth Klarman “Volatility is not the same thing as risk. When people do try to measure investment risk, they typically assess the historic volatility of an investment compared to that of the overall market (known as beta).” A common-sense view of risk however should be “how much one can lose and the probability of losing it.”

The father of Value Investing, Benjamin Graham, writes, “The essence of investment management is the management of RISKS, not the management of RETURNS. If one manages the downside the upside will take care of itself.”

“When conditions are generally benign, with markets perhaps even shrugging off bad news, investors tend to forget just how much they can lose and are lulled into sleeping well when they should be tossing and turning. Risk moves to the forefront of investor consciousness only when things are already going badly.” SK

Most money managers face significant pressure to generate return in the shorter term, but it is “crucial to remember that to succeed at investing, you have to be around at the finish.” SK

It’s easy to proclaim your performance in a rising market but one “only find out who is swimming naked when the tide goes out.” Warren Buffett.

Ben Inker, head of asset allocation at GMO once stated that “if one has to outperform, he/she will have to take a risk of looking like an idiot.” i.e. to look for stocks that have underperformed the broader market and for those stocks that the market dislikes. "This increases the risk of getting fired."

Look like an idiot and stop dodging short term gains. Instead, Focus your energy for long term returns. 

Happy Investing!!!