Gurus

High Risk ≠ High Return

Tan KW
Publish date: Sat, 22 Aug 2020, 02:27 PM

Here is your weekly Saturday newsletter, where I share the latest updates from the site, an idea worth thinking about, few stories you shouldn’t miss, and a question for you. Let’s get started.

On SN This Week

High Risk ≠ High Return
Howard Marks of Oaktree Capital, wrote this in his seminal book The Most Important Thing –

In bull markets – usually when things have been going well for a while – people tend to say ‘Risk is my friend. The more risk I take, the greater my return will be. I’d like more risk, please.’

The truth is, risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so… and risk compensation will disappear. But only when investors are sufficiently risk-averse will markets offer adequate risk premiums. When worry is in short supply, risky borrowers and questionable schemes will have easy access to capital, and the financial system will become precarious. Too much money will chase the risky and the new, driving up asset prices and driving down prospective returns and safety.

Risk, which Marks and Warren Buffett have often defined as losing significant amounts of money and permanently, often moves in the same direction as valuations.

In other words, risk increases/decreases as valuations rise/fall. At the same time, high valuations imply weak prospective returns, while depressed valuations imply strong prospective returns. Consequently, both Marks and Buffett suggest that risk is lowest precisely when prospective returns are the highest, and risk is highest precisely when prospective returns are the lowest.

Economist and investment strategist Peter Bernstein said –

The riskiest moment is when you are right.

In one of his posts from 2015, Jason Zweig wrote this –

In much of life, doing things right over and over again is a sign of skill; expert musicians, for instance, rarely hit a wrong note. And the skill of one professional musician doesn’t make it harder for the others to be equally expert. But in the financial markets, where so many investors are highly skilled, their actions cancel each other out as they quickly bid up the prices of any bargains—paradoxically making luck the main factor that distinguishes one investor from another.

And a streak of being right can make anyone forget how important luck is in determining the outcome.

Watch out for that streak of being right, dear investor!

A Few Stories You Shouldn’t Miss

Meditations

It is very simple to be happy, but it is very difficult to be simple.

~ Rabindranath Tagore

Life has no meaning. Each of us has meaning and we bring it to life. It is a waste to be asking the question when you are the answer.

~ Joseph Campbell

A Question for You
We are the average of the 5-10 people closest to us.

Ask yourself – Are my closest friends a reflection of my value system and my goals for my life?

 

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That’s about it from me for today.

 

Have a great weekend.

Stay safe.

With respect,
— Vishal

 

https://www.safalniveshak.com/high-risk-does-not-equal-high-return/

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