About this video

• Video Title: How to Think About Risk with Howard Marks
• Channel: Oaktree Capital
• Speakers: Howard Marks
• Duration: 36:11

Overview

This video features Howard Marks discussing his perspective on risk in investing. He emphasizes that risk should be understood as the probability of loss, not merely volatility, and that it is unquantifiable in advance. Marks explores various facets of risk, including its counterintuitive and perverse nature, the relationship between risk and return, and effective risk management strategies, advocating for intelligent risk-bearing rather than risk avoidance.

Key takeaways

• Definition of Risk: Risk is defined as the probability of loss, contrasting with academic definitions that focus on volatility.
• Unquantifiable Nature of Risk: Risk cannot be precisely quantified, either before or after an event, and is best assessed through subjective judgment and expert opinion.
• Counterintuitive and Perverse Aspects of Risk: Risk doesn't always correlate with asset quality; high-quality assets can become risky if overvalued, and low-quality assets can be safe if sufficiently cheap. Additionally, perceived safety can lead to riskier behavior, and lower prices can actually decrease risk while rising prices increase it.
• Risk vs. Return: While riskier assets are perceived to require higher returns, this doesn't guarantee those returns will materialize. Superior investors understand the probability distribution of outcomes and whether potential returns compensate for the risks.
• Risk Management: Effective risk management involves continuous assessment and control, not avoidance. The goal is to achieve asymmetry – participating in gains while limiting losses – by assembling portfolios that perform well when expected and mitigate declines when they don't.