What Risk Is All About: Uncertainty

Howard Mark’s recent  quarterly update to his Oaktree Clients is an investment smoothie for the brain. Reading this memo is an adrenaline shot for your mind. This comes without the unpleasant side effect of your Vitamix blasting through your kitchen like an industrial grade leaf blower. Mark’s analysis of risk is nutrition for your cerebral cortex in its most pure and potent form.


While reading this masterpiece, I noted some of his main points regarding risk and tried to provide a translation for people who do not have Mr. Marks knowledge and aptitude for this subject.  This includes about 99% of the population, including myself. Here are some of my favorite highlights.

1. Permanent Loss is very different from volatility or fluctuation- Distinguishing quotation loss from losing all your money is an essential skill. This means understanding that the S&P 500 can temporarily lose 50% of its value while Pets.com can lose 100%.

2. (Regarding Risk) This is something I prefer not to debate, especially with people who are sure they have the answer but haven’t bet much money on it- Don’t debate risk management technique’s with people who do not eat their own cooking or have no skin in the game. An economist, media pundit, or reporter will look at things differently than a money manager. Roman engineers had to sleep under the bridges’ they built.

3. In economics and investments, because of the key role played by human behavior, you just can’t say for sure that “if  A then B” as you can in real science.- Forecasting is a waste of time. Human beings are irrational and behave in unpredictable ways. Investing is not a hard science because of the unlimited unpredictable variables that can effect the eventual outcome.

4. Not being able to know the future doesn’t mean we can’t deal with it- It is easier to avoid a big loss than recover from one. Play the game when the odds are in your favor. We have no control over outcomes but we have control over process.

5.Probabilities are likelihoods and very far from certainties-  The right process will increase your odds of success but not guarantee it. There is a lot of stuff we don’t know and cant predict. Deal with it. Unfortunately many achievements and failures are determined by luck. Understand this and don’t fight it.


6. Risky investments are- by definition- far from certain to deliver on their promise of high returns- This is why stocks over the long term return 9-10% while Bonds return 3-4%. The stock return is probable but not written in stone. There is a price for the possibility of higher returns and it is called volatility .

7. And when risk bearing doesn’t work, it really doesn’t work, and people are reminded what risk’s all about. Things can get very bad, very quickly. Your advisors risk profile survey will be useless in these moments.

8. Invariably things can get worse than people expect. Maybe the worst case means “the worst we have seen in the past.”- Just because the market lost 50% a few years back doesn’t mean it cannot lose 80-90% in the future. Take your worst case scenario and double it.

9. Never forget the six-foot tall man who drowned crossing the stream that was five-foot deep on average- Average investment returns are anything but. Returns are lumpy and concentrated, both good and bad. It is rare that we see an average market return on a yearly basis. Plan accordingly.

10. Do you consider it a mistake to have paid the premium in a year which your house didn’t burn down?- Insurance is not an investment. It is to protect your investments from the unexpected and unpredictable. Losing sight of this can lead to permanent loss of capital.

11. The key requisites for risk control also include humility, lack of hubris, and knowing what you don’t know.- Never be afraid to say “I don’t know.” When you are the most confident in an expected outcome you are in the most danger. The investor who has all the answers does not even understand the questions.

12. While you shouldn’t expect to make money just for bearing risk, you also shouldn’t expect to make money without bearing risk- Avoiding all risk can be just as damaging as taking extra risk. Earning nothing on your money stored in a mattress will guarantee purchasing power loss due to inflation.


This is just my meager attempt to give you a sampling of this amazing letter. Do yourself a favor and read it in its entirety. Consider it Crossfit for the investors brain.


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