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!!!
This is a re-post of an article written in 2011.
This is a re-post of an article written in 2011.
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