"How to Think About Risk: Howard Marks’ Comprehensive Guide"

It's the losses that get you, not the bouncing around.

From the CFA Institute's Enterprising Investor blog, September 13:

Risk is not simply a matter of volatility. In his new video series, How to Think About Risk, Howard Marks — Co-Chairman and Co-Founder of Oaktree Capital Management — delves into the intricacies of risk management and how investors should approach thinking about risk.  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.

Below, with the help of our Artificial Intelligence (AI) tools, we summarize key lessons from Marks’s series to help investors sharpen their approach to risk.

Risk and Volatility Are Not Synonyms

One of Marks’s central arguments is that risk is frequently misunderstood. Many academic models, particularly from the University of Chicago in the 1960s, defined risk as volatility because it was easily quantifiable. However, Marks contends that this is not the true measure of risk. Instead, risk is the probability of loss. Volatility can be a symptom of risk but is not synonymous with it. Investors should focus on potential losses and how to mitigate them, not just fluctuations in prices.

Asymmetry in Investing Is Key

A major theme in Marks’s philosophy is asymmetry — the ability to achieve gains during market upswings while minimizing losses during downturns. The goal for investors is to maximize upside potential while limiting downside exposure, achieving what Marks calls “asymmetry.” This concept is critical for those looking to outperform the market in the long term without taking on excessive risk.

Risk Is Unquantifiable

Marks explains that risk cannot be quantified in advance, as the future is inherently uncertain. In fact, even after an investment outcome is known, it can still be difficult to determine whether that investment was risky. For instance, a profitable investment could have been extremely risky, and success could simply be attributed to luck. Therefore, investors must rely on their judgment and understanding of the underlying factors influencing an investment’s risk profile, rather than focusing on historical data alone....

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