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hi I'm Howard marks and this is how to
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think about
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[Music]
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risk the title of this class is how to
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think about risk that's an important
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title not what to think how to think the
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first question is what is risk risk in
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my opinion is the ultimate test of an
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Investor's skill the return alone
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doesn't tell you how good a job the
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manager did the key question is you see
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the return you must ask how much risk
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did the manager bear to get that return
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now let's look at this range of managers
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what we posit is that the market is up
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10% or down 10% now let's look at some
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individual managers the first one is up
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10 when the Market's up 10 and down 10
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when the Market's down 10 ACC lishes
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nothing you might as well have invested
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in an index fund that emulates the
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performance of the market no skill no
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value added now let's look at the second
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one up 20 when the market goes up 10
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down 20 when the market goes down 10 no
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skill no value added just a lot of
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aggressiveness what about this one up
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five when the Market's up 10 down five
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when the Market's down 10 again no
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selection ability no discernment no
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value added just defensiveness you don't
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need help in achieving that and you sure
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shouldn't pay a lot for it but what
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about the next one he or she is up 15
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when the Market's up 10 and down 10 when
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the Market's down 10 so in other words
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Market type losses on the downside but
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Superior gains on the upside value added
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what I call asymmetry does better in the
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good times than does poorly in the bad
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times but what about this one and I
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think this is the most interest I think
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maybe it characterizes Me Maybe it char
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izes oak tree to some extent up 10 when
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the Market's up 10 down five when the
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Market's down 10 so Market type gains in
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the good times I personally think that
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performing with the market when it does
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well is good enough and that's almost
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all the time nobody should have to beat
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the market when it does well but if you
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can do that and at the same time be
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ready to decline less when the market
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has it down spells I think that's
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accomplishing something very
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[Music]
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important I believe that risk is not
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volatility the academics developing
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investment Theory largely at the
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University of Chicago in the early 60s
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just a couple of years before I got
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there adopted volatility as their
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measure of risk I believe they did so
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largely because volatility is readily
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quantifiable and nothing else is I think
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volatility can be an indicator of the
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presence of risk a symptom if you will
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but it's not risk itself so if risk is
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not volatility then what is it and in my
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opinion and in the real world sense risk
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is the probability of loss I think this
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is what most people mean when they say
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risk and I think that this is what
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people demand compensation for if
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they're going to Bear it uh nobody
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sitting around at Oak Tree says well you
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know uh we shouldn't make that
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investment because it might be volatile
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or uh because it might be volatile we
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should demand a higher return no they
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say that about the possibility of loss
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we're not going to make that investment
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because the possibility of loss is too
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high or because of the possibility of
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loss we're going to demand a risk
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premium in terms of the return this is
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risk the possibility of loss now another
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important question is is risk
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quantifiable in advance and I believe
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it's not like most things occurring in
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the future risk cannot be anything
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except a matter of opinion I was writing
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my first memo about risk in 2006 I wrote
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about my belief that risk is not
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quantifiable in advance and then I hit
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the return key and went on to the next
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section and wrote something I had never
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thought about before
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my belief that risk is unquantifiable
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even after the fact and I think this is
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a fascinating topic uh you buy something
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for a dollar and a year later you sell
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it for $2 was it
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risky and the interesting thing is that
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you can't tell from the outcome a
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profitable investment may or may not
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have been risky was it a safe investment
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that in the case of my example was sure
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to double or was it a risky investment
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where you got lucky in terms of the
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outcome and as I say you can't tell from
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the outcome the bottom line is to me
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it's impossible to quantify risk in
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advance or even in
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hindsight the possibility of loss is not
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the only form of risk there are lots of
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forms of risk my last memo on the
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general subject it's called risk
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Revisited again and I talk in there
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about 24 or 25 different forms of risk
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some serious some facius some important
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some less important and obscure but
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still it comes in many forms the risk of
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missing opportunities is another
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important risk in other words if you
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think about it the risk of not taking
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enough risk another really important
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form uh of risk I think one of the key
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risks in investing is the chance of
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being forced out at the bottom which is
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a bigger mistake buying at the high and
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seeing a decline or selling out at the
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low and missing out on the recovery
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clearly it's the ladder if you buy at a
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high and you experience a decline if
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you're able to hold throughout and not
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lose your nerve the next high is usually
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higher than the last High the fact that
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you experienced a downward fluctuation
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might have been uncomfortable for a
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little while
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but by the time the new high is achieved
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you're you're you're back to to your
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cost and more but if you sell at the
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bottom and miss out on the subsequent
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recovery that means you've gotten off
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the track of investing and uh may never
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get back on in my opinion selling at the
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bottom it's the cardinal sin in
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investing
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[Music]
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now I want to get a little philosophical
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one of my great Heroes Peter Bernstein
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probably the best thinker in a
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philosophic sense and and a real
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investment Sage who sadly passed away
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around 2009 one said essentially risk
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says we don't know what's going to
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happen we walk every moment into the
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unknown he said there's a range of
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outcomes and we don't know where the
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actual outcome is going to fall within
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the range and often we don't know what
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the range is so in other words we have
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ignorance to varying degrees about what
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the future holds and it is from this
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ignorance uh that risk ensues if we knew
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what was going to happen by definition
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there would be no risk in the memo that
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I mentioned before risk Revisited again
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there's a great quote uh that I got from
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a Peter Bernstein memo and I thought it
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was so important that I took it over
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word for word in my memo it's from GK
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Chesterton who was a English uh writer
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and he said the following and I'm going
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to give it to you word for word uh
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because it's so important the real
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trouble with this world of ours is not
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that it is an unreasonable world or even
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that it is a reasonable one the
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commonest kind of trouble is that it is
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nearly reasonable but not quite life is
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not an
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illogicality yet it is a trap for
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logicians it looks just a little more
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mathematical and regular than it is its
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exactitude is obvious but its
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inexactitude is hidden its wildness lies
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in weight in other
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words we know what's likely to
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happen we know the other things that
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probably could happen instead
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we have little appreciation for the
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things that are highly unlikely to
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happen but could and these are what we
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call in modern day terms the uh tail
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events my friend Rick kanaine once said
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that 96% of financial history has
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occurred within two standard deviations
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but everything interesting has happened
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outside of two standard deviations
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that's the wild part
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[Music]
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so now let me try in a slightly
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philosophical sense to reflect to you
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how I think about risk how I think you
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might consider risk through four basic
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points number one there was a professor
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at the London Business School who said
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risk means more things can happen then
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will happen for most events that lie in
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the future there are a number of things
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that could occur we don't know which one
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it will be that's where the risk comes
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in more things can happen then will
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happen number two as a result of that
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the future should be viewed not as a
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fixed outcome that's destined to happen
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and capable of being predicted but as a
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range of possibilities and hopefully
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because you have some insight into their
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respective likelihoods as a probability
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distribution the most likely the less
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likely the unlikely but not impossible
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number three it's important to accept
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that even when you know the
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probabilities that doesn't mean you know
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what's going to happen uh this is uh
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something that I think many people fail
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to grasp I play a lot of back gamon and
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a lot of my examples uh on risk and
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uncertainty uh come from the game of
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back gamut which is played with a pair
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of dice and when you roll your pair of
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dice
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we know exactly in advance what the
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probabilities are each die has six sides
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there are 36 possible combinations of
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the six sides we know how many of them
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for example will add up to seven and
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seven is the most likely single outcome
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1 16 25 34 43 52 61 there are six
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possibilities out of the
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36 that will give you a seven that's the
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most likely outcome uh six out of 36
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that's 16.7% probability now what if
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instead you want to know about a six
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well with a six there are five
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possibilities five possibilities out of
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36 that's a little less than a seventh
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and then when you get down to uh the
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number two is's only one one one one out
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of 36 and for the number 12 only one 66
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one out of 36 both of those are about a
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3% probability of happening so we know
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exactly what the probability
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distribution looks like uh uh we know
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what's the most likely the other likely
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possibilities and the unlikely
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possibilities we still don't know what's
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going to happen so knowing the
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probabilities does not eliminate the
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uncertainty I work with a professor at
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Warden named Chris gsy and the way he
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put it to me one time we live in the
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sample not the universe in other words
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the universe statistics
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like I just explained for the dice
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determine the things that could happen
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and maybe their possibility but we live
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in the sample we only have one outcome
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and therein lies the uncertainty a great
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way to think about this is on Super Bowl
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morning in 2016 they had a former
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football player on uh and he said what I
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thought was one of the smartest things
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about uh probability I had ever heard
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this game was Denver versus Carolina and
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Carolina was heavily favored and they
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asked him who he thought would win and
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he said the following Carolina wins
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eight times out of 10 this could be one
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of the two now this gives you the UN the
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essence of probability and the essence
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of risk uh most people if they hear that
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something's 80% likely to happen they
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say well then I guess we know what's
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going to happen I guess they might might
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as well not play the game no 80% likely
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means that the other team should win one
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game out of five so have to play the
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game because we have to figure out which
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game this will be and that leads to
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number four I take Dimson statement that
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uh risk means more things can happen
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than will happen and I turn it
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over even though many things can happen
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only one will thus the expected value
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the probability weighted average of the
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possible outcomes which is the basis on
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which people make uh many decisions it
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can be irrelevant they take each outcome
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they multiply it by the probability they
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add them up and they get the expected
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outcome and many people will say well
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we're going to take the course of action
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that has the highest expected value but
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sometimes the expected value isn't even
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among the possibilities now this sounds
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highly counterintuitive but think about
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this let's consider a course of action
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which has four possible outcomes 2 4 6
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and 8 and let's say that we conclude
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that each of those four is equally
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likely to happen so what we do is we
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take each one 2 4 6 8 we multiply it by
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25% the possibility of it happening and
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we add it together and in this case the
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the expected value of 2 468 is five but
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five can can't happen remember I said
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the outcomes can be 2 4 6 and eight so
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it I'm I'm only going through this to
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show you the possible fallacy of
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expected value there's another problem
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with expected value because even though
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course of action a can have a higher
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expected value than course of action B
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course of action a may include some
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possibilities that you just can't live
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with maybe course of action a uh
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includes some remote possibility that
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you lose all youry money and even though
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it's highly unlikely you you may say I
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just don't want to contemplate that so
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you don't take a you take b instead
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which has a slightly lower expected
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value uh but without the risk of
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Ruin now moving on a little bit to to
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talk about the character of risk I think
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it's interesting to note that risk is
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counterintuitive they did an experiment
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in the town of draon Holland they took
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away all the traffic lights traffic
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signs and Road markings what do you
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think happened to the level of accidents
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and
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fatalities it went down how could it
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possibly have gone down when all the
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road AIDS were gone and the answer is
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people said oh there are no more traffic
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signs traffic lights or Road markings
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I'd better drive more carefully on the
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other hand Jill fredson is uh an expert
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on a avalanches and uh she said that
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better gear is created every year which
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makes it easier and more feasible to to
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climb and yet the risk the number of
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fatalities and accidents in Climbing
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doesn't go down how can that be
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obviously counterintuitive people see
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that better gear is being invented and
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they say Well since we have better gear
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we can do riskier things and the level
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of accidents and fatalities is
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maintained even in in spite of the
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arrival of better gear so if you think
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about those two examples you realize
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that the risk of an activity doesn't
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just lie in the activity in itself but
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importantly in how the participants
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approach it the degree of risk present
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in a
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market or in an investment doesn't come
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just from the market or the investment
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but how people participate in that
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investment and if they conclude that the
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market has become safer they may say
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that that frees them to do riskier
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things and that's why I believe that
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risk is low when investors behave
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prudently and High when they don't just
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as risk is counterintuitive I believe
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that risk is perverse as I said the
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riskiest thing in the world is the
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belief that there's there's no risk a
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high level of risk Consciousness on the
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other hand tends to mitigate risk so
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when people say well that's really risky
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if they take a a cautious approach then
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it becomes safe as an asset declines in
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price most people say oh it's risky look
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how it's falling but with the lower
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price it actually becomes less risky as
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an asset appreciates most people say
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that's a great asset look how well it's
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doing but the rising price makes it
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riskier so again pervert
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and this perversity is one of the main
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things that render most people incapable
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of understanding risk I think it's
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important to grasp a concept risk is
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hidden and risk is deceptive loss is
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what happens when risk the potential for
00:18:48
loss collides with negative events you
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know Buffett says everything the
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greatest and he said that uh it's only
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when the tide goes out that we find out
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who's been swimming naked
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uh it's only in times of testing that
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investors and their strategies uh are
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examined uh for the risk they really
00:19:08
held an example of that I wrote in my
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book The most important thing uh those
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of us who live in California as I did at
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the time our houses might contain a
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construction flaw but if all is well
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that flaw sits there for year after year
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and doesn't produce any loss it's only
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when the earthquakes occur that the
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house is tested and the flaws are
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disclosed and the risk the potential for
00:19:36
loss turns into actual loss so similarly
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an investment can be risky but if it
00:19:43
only exists in salutary environments it
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may look like a winter for a long time
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and it may look safe for a long time the
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fact that an investment is susceptible
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to a risk that occurs extremely rarely
00:19:58
uh what I call an improbable disaster
00:20:01
what Nasim Nicholas TB called The Black
00:20:03
Swan in his excellent book The
00:20:06
infrequency of loss can make it appear
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that the investment is safer than it
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really is and of course that's an
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entirely risky uh conclusion so uh the
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infrequency with which uh risk turns
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into loss uh can be deceptive uh and
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cause people to underrate the risk
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involved in an activ
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[Music]
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one of the most important things for
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every investor to learn is that risk is
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not a function of asset quality this too
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sounds counterintuitive there's a belief
00:20:46
that high quality assets are safe and
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lowquality assets are risky I believe
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quite the opposite a high quality asset
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can be priced so high that it's risky I
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came to to work in this industry in
00:20:59
September of 1969 the banks at that time
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and I was hired by one of them engaged
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in what was called nifty50 investing
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they invested in what were considered to
00:21:10
be the 50 best and fastest growing
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companies in America companies so good
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that nothing bad could ever happen and
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there was no price too high for their
00:21:19
stocks and if you bought those great
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companies the day I got to work in
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September of 1969 and if you held their
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stocks tenaciously for the next five
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years you lost more than 90% of your
00:21:31
money because the prices paid were just
00:21:34
too high and unsustainable and roughly
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half of those companies did run into
00:21:40
serious fundamental problems their
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quality alone or their perceive quality
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did not impart to them the safety that
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people thought it would and in fact
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because people thought they were so safe
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they bid them up to prices which in fact
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made them risky on the other hand a
00:21:57
lowquality asset can be cheap enough to
00:21:59
be safe again this seems
00:22:02
counterintuitive and maybe even perverse
00:22:05
when I left the world of equities in
00:22:08
1978 I was asked by City Bank to start
00:22:11
their activity in high yield bonds and
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now I was investing in the lowest
00:22:16
quality uh public companies in America
00:22:20
and making money steadily and safely the
00:22:23
ju toos of these events taught me an
00:22:26
important lesson uh that I want to share
00:22:28
sh with you uh so that you don't have to
00:22:31
learn it firsthand my conclusion was
00:22:35
it's not what you buy it's what you pay
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and investment success doesn't come from
00:22:39
buying good things but from buying
00:22:40
things well and if you don't know the
00:22:43
difference you have to study up um there
00:22:47
are no assets that are so good that they
00:22:51
can't become overpriced and
00:22:54
dangerous there are very few assets that
00:22:57
are so bad that they can't be cheap
00:23:00
enough to be attractive as Investments
00:23:03
so this is a a simple concept it sounds
00:23:08
like to me but I hope you'll spend a lot
00:23:10
of time thinking about its
00:23:13
[Music]
00:23:19
consequences now let's talk for a while
00:23:21
about the relationship between risk and
00:23:23
return this is one of the most important
00:23:25
of all the topics when I got to
00:23:27
University of Chicago The Chicago School
00:23:30
of theory with regard to investment had
00:23:32
just been developed mostly between 62
00:23:35
and 64 and I arrived in ' 67 and there
00:23:39
was a graphic that we saw all the time
00:23:43
it shows uh return on the vertical axis
00:23:46
risk on the horizontal axis and an
00:23:48
upward sloping line to the right we call
00:23:51
that a positive correlation one goes up
00:23:54
the other goes up as well now most
00:23:56
people would look at that graphic and
00:23:59
say well that means two things that uh
00:24:02
riskier assets have higher returns and
00:24:06
if you want to make more money the way
00:24:07
to do it is to take more risk I think
00:24:10
that's a terrible formulation very
00:24:12
simply if it were true that riskier
00:24:14
assets produce higher returns then they
00:24:16
wouldn't be riskier would they so that
00:24:19
can't be the right
00:24:20
explanation what the upward sloping line
00:24:23
the positive correlation means is that
00:24:26
Investments that are perceived as being
00:24:28
risky have to be perceived as offering
00:24:32
higher returns to induce people to make
00:24:34
those Investments that makes perfect
00:24:36
sense the only thing is they don't have
00:24:39
to deliver and it's from the possibility
00:24:41
that the projected returns will not be
00:24:44
delivered that the risk ensues when you
00:24:48
look at the old graph the linearity of
00:24:51
the relationship between risk and return
00:24:55
implies a Dependable relationship and
00:24:58
I've always felt that that was
00:25:00
misleading I was never happy uh when I
00:25:03
got out into the real world and and and
00:25:05
had to live with the consequences and so
00:25:08
I developed my own version of that chart
00:25:12
I took some little bell-shaped
00:25:14
probability distributions and I turned
00:25:16
them on their side and I superimpose
00:25:19
them on the same line it's the same
00:25:21
underlying line just now with some
00:25:23
embellishment with the old graph as you
00:25:26
moved from left to right the risk
00:25:28
increased and the return increased but
00:25:31
with this new graft As you move from
00:25:32
left to right the expected return
00:25:34
increases just as it did in the old one
00:25:37
but at the same time the range of
00:25:39
possibilities becomes wider and the
00:25:41
worst outcomes become worse that's risk
00:25:45
this is the way to think about the risk
00:25:48
return
00:25:49
[Music]
00:25:54
relationship so now let's talk a little
00:25:57
more about how risk should be handled
00:26:00
what determines investment success and
00:26:03
the best way I have uh to communicate
00:26:06
this to you in my opinion is like the
00:26:10
act of pulling one Lottery Ticket the
00:26:13
outcome from a bowl full of lottery
00:26:16
tickets the full range of possible
00:26:19
outcomes as Dimson said we're going to
00:26:21
have one outcome there could be many
00:26:24
outcomes and the outcome that occurs
00:26:26
never amounts in my opinion
00:26:28
to anything but one ticket pulled from
00:26:31
among the many in my opinion Superior
00:26:35
investors have a better sense for the
00:26:38
tickets in the bowl for What proportion
00:26:42
of them are winners and What proportion
00:26:44
of them are losers than do most other
00:26:46
people that's what makes them Superior
00:26:49
and thus they have a better grasp of
00:26:53
whether it's worth participating in a
00:26:55
any given Lottery and how heavily to bet
00:26:59
now how should each of us deal with risk
00:27:03
I think that risk is best assessed
00:27:05
through subjective judgment since risk
00:27:07
cannot be measured gauging it has to be
00:27:09
the province of subject matter experts
00:27:13
and I'm clearly uh jist on the subject
00:27:16
of
00:27:17
quantification I believe imprecise
00:27:19
qualitative expert opinion about the
00:27:22
probability of
00:27:23
loss is far more useful than precise but
00:27:27
largely irrelevant numbers concerning
00:27:29
past and projected volatility so what is
00:27:34
the essence of risk management Peter
00:27:36
Bernstein again my my hero he said
00:27:41
because of the existence of risk things
00:27:44
are going to be different from what we
00:27:46
expect from time to time how well are we
00:27:50
prepared to deal when it's different
00:27:53
this is a great formulation there's no
00:27:56
challenge dealing with the events when
00:27:59
they turn out as we expected the
00:28:01
question is are we prepared for when
00:28:04
they don't turn out as expected
00:28:07
according to Bernstein risk just means
00:28:09
things are uncertain good things can
00:28:11
happen as well as bad things but I think
00:28:14
the definition of risk should emphasize
00:28:17
the bad things and thus I would say risk
00:28:20
is the possibility that from the range
00:28:22
of Uncertain outcomes an unfavorable one
00:28:26
will be the one that materialize izes it
00:28:29
can consist of suffering a permanent
00:28:31
loss of capital when bad things happen
00:28:33
it can also consist of missing out on
00:28:35
gains when good things happen these
00:28:37
things have to be balanced let's say you
00:28:40
think that if you buy something today
00:28:41
there's a one-third chance it'll be down
00:28:43
in six or 12 months what will you do
00:28:46
about that risk many people will say
00:28:48
well I just wouldn't buy it but what do
00:28:50
you do about the other 2third the chance
00:28:53
that it'll be up in 6 to 12 months how
00:28:55
do you balance the two risks and you
00:28:57
know in the real world we can't make
00:28:59
decisions in one dimension we basically
00:29:02
have to balance I think that risk is
00:29:04
something that should be dealt with uh
00:29:06
constantly continuously not
00:29:09
sporadically that's why I Bridal when I
00:29:12
hear this formulation is this a risk on
00:29:14
Market or a risk off Market remember
00:29:17
risk produces loss when bad things
00:29:20
happen and that's when we need risk
00:29:22
control but I believe we never know when
00:29:25
bad things will happen and thus when
00:29:28
risk control will be needed I think the
00:29:30
right model for thinking about whether
00:29:32
we need risk control isn't American
00:29:35
football is soccer in American football
00:29:38
the team with the ball has the offense
00:29:40
on the field they have four tries to go
00:29:43
10 yards if they go 10 yards they get
00:29:45
four more tries to go 10 more yards and
00:29:47
if they can keep doing it they
00:29:49
eventually score but if the team doesn't
00:29:52
go 10 yards in four tries the referee
00:29:55
Blows the Whistle the ball goes over to
00:29:58
to the other team and they try to go 10
00:30:00
yards in four tries in the opposite
00:30:02
direction so we have two teams switching
00:30:05
between offense and defense changing
00:30:07
Personnel when there are stoppages that
00:30:10
has nothing to do with the real world
00:30:12
the right model as I say is what the
00:30:15
rest of the world calls football the
00:30:18
same 11 people mostly play the whole
00:30:21
game nobody tells you when to be on
00:30:23
offense or defense and there are very
00:30:26
few stoppages in which to adjust tactics
00:30:29
and and
00:30:31
Personnel that's the real world in
00:30:34
investing one of the key decisions is
00:30:36
when to be on offense when to be on
00:30:38
defense how much to allocate to each of
00:30:41
those but nobody tells you when to do it
00:30:43
and nobody stops the game to give you
00:30:45
time I think the best model for
00:30:48
investing and risk management is
00:30:51
automobile insurance we all drive we all
00:30:54
have cars we all have insurance on our
00:30:56
cars but I don't think of us get to the
00:30:58
end of a year and say I wish I hadn't
00:31:00
had Insurance because I didn't have an
00:31:03
accident we like having insurance for
00:31:05
the safety it give us regardless of
00:31:08
whether or not we have an accident in a
00:31:10
particular year I think about the
00:31:12
intelligent bearing of risk for profit
00:31:15
back in 1981 I was interviewed by one of
00:31:18
the first cable networks and uh the
00:31:21
reporter said to me how can you invest
00:31:23
in high yield bonds when you know some
00:31:25
of them are going to go bankrupt and for
00:31:28
some reason I was able to come up with
00:31:29
the right answer on the spot I said the
00:31:32
most conservative companies in America
00:31:34
are the life insurance companies how can
00:31:36
they Ure people's lives when they know
00:31:38
they're all going to die and I think
00:31:40
it's an interesting question but the
00:31:41
life insurance company is number one
00:31:44
taking a risk that it's aware of they're
00:31:46
not shocked when somebody dies that's
00:31:48
the way it goes number two they take a
00:31:51
risk they can analyze and when I was a
00:31:53
young man and got my first insurance
00:31:54
policy they sent a doctor to my house to
00:31:56
see if I was healthy number three they
00:31:58
take a risk that can be Diversified so
00:32:01
no life insurance companies insure just
00:32:04
smokers or just people who live in on
00:32:07
the San Andreas fault or just
00:32:09
skydivers just young people or just old
00:32:11
people they have a mix a diversified
00:32:13
portfolio and they take a risk that
00:32:16
they're well paid to Bear they figure
00:32:18
out the probability of what they're
00:32:20
going to have to pay you based on
00:32:21
Actuarial assumptions they allow some
00:32:24
windage for the uncertainty and then
00:32:26
they charge you a premium we do the same
00:32:28
we take credit risk that we're aware of
00:32:31
we analyze it we take a risk that we can
00:32:33
diversify we have large numbers of
00:32:35
Holdings in every portfolio which
00:32:38
respond to different factors and it's a
00:32:40
risk we're well paid to Bear we get
00:32:42
What's called the risk premium or a
00:32:44
yield premium to take the risk of
00:32:46
default so the bottom line is that I
00:32:48
believe risk is kept under control in
00:32:51
Superior portfolios that's one of the
00:32:53
things that Superior investors do highly
00:32:56
skilled investors assemble portfolio
00:32:58
that will produce good returns if things
00:32:59
go as expected and resist declines if
00:33:03
they don't this asymmetry is in my
00:33:07
opinion the critical element the
00:33:10
Cornerstone of superior investing
00:33:12
assembling a portfolio that incorporates
00:33:14
risk control along with the potential
00:33:17
for gains is a great accomplishment but
00:33:20
it's often a hidden accomplishment
00:33:22
because risk only turns into loss
00:33:26
occasionally When the tide go goes out
00:33:29
but The Prudent investor and hopefully
00:33:32
his or her clients knows that risk is
00:33:35
being controlled even at times when it
00:33:38
doesn't come to the surface so I think
00:33:41
that risk is something to be managed and
00:33:44
controlled but not avoided risk control
00:33:48
is indispensable risk avoidance is not
00:33:51
an appropriate goal in investing Will
00:33:53
Rogers said you've got to go out on a
00:33:55
limb sometimes because that's where the
00:33:57
fruit is I think and my experience tells
00:34:00
me from watching others that risk
00:34:03
avoidance equates to return
00:34:06
avoidance intelligent bearing of risk
00:34:09
should be able to enable us to make good
00:34:13
returns with the risk under
00:34:15
[Music]
00:34:21
control so what's the bottom line of all
00:34:25
that
00:34:26
foregoing you shouldn't expect to make
00:34:28
money without bearing risk you shouldn't
00:34:31
expect to make money just for bearing
00:34:33
risk risk is best handled on the basis
00:34:36
of accurate subjective judgments made by
00:34:39
experienced expert investors who
00:34:42
emphasize risk
00:34:44
Consciousness the great challenge in
00:34:46
investing is to limit uncertainty and
00:34:49
still maintain substantial potential for
00:34:52
gains and in conclusion I'll just say
00:34:55
that outstanding investors are out
00:34:57
standing for the simple reason that they
00:35:00
have a
00:35:01
superior sense for the probability
00:35:04
distribution that governs future events
00:35:07
the tickets in the bowl and for whether
00:35:09
the potential return compensates for the
00:35:13
risks that lurk in the distribution's
00:35:16
unattractive left-and tail this is what
00:35:19
enables them to achieve the asymmetry
00:35:22
that characterizes Superior investors
00:35:25
participating strongly in the game GS
00:35:27
when there are gains and avoiding many
00:35:30
of the losses when there are losses I
00:35:33
hope the foregoing discussion will help
00:35:35
you be among
00:35:37
[Music]
00:35:56
them for
