Howard Marks | The Knowledge Project #53

Defining Risk

Howard Marks discusses the complex nature of risk, defining it as the probability of bad outcomes rather than mere volatility. He emphasizes that both the probability of loss and the probability of missed gains are crucial considerations for investors. Marks also highlights the human tendency to prioritize avoiding losses over seizing opportunities, especially for those managing other people's money 1.

Risk is the probability of bad outcomes. There are really at least two risks that we should think about. One is the probability of loss and the other is the probability of gains that you miss out on.

--- Howard Marks

He further explains that understanding risk involves recognizing its inherent uncertainties and the limitations of using historical data to predict future outcomes 2.

   

Managing Risk

Marks delves into strategies for managing risk, stressing the importance of having a clear view of the probability distribution of future events. He notes that even with an accurate probability distribution, outcomes remain uncertain, akin to rolling dice in a game of backgammon 3. He also emphasizes the significance of a risk control mindset, where avoiding losses is prioritized to allow winners to emerge naturally 4.

If we avoid the losers, the winners take care of themselves.

--- Howard Marks

Marks underscores the value of distinguishing between bad decisions and bad outcomes, advocating for a culture that avoids assigning blame for unfavorable results 4.