Risk and Return – The truth about investing

Howard Marks – The legendary american investor that manages close to USD 122+ billion dollars through his firm Oaktree Capital Management, is renowned the world over for his Investor memos. His memos are often used as the holy grail for investing and enjoy an equal amount of popularity as Warren Buffet’s shareholder letters do.

Howard Marks, in his first trip to India in 2017 had given a talk called “The Truth About Investing” for the CFA society, which can be accessed here. Mr. Marks covers interesting facets about all the aspects about investing starting right from how future predictions are a futile exercise, how immensely important the current scenario is and a host of other ‘truths’. All of these great truths can be accessed here.

Risk and Return

Since a very young age we have always been told about the relationship between Risk and Return. “Higher the risk, higher the return”.

Marks interprets this in a beautiful manner. If higher risk brought in higher returns, one should only look at riskier assets to enhance their returns.

These are traps into which most investors fall, especially in times when things are going well and risk taking is being rewarded. It’s true that investments that seem riskier must appear to offer higher returns in order to attract capital. But if risky investments could be counted on to produce high returns, they wouldn’t be risky.

So how should one interpret risk?

This is how the Risk Return graph should be interpreted.

Subscribe to my newsletter here.

Conclusion

As risk increases:

  • the expected return rises,
  • the range of possible outcomes becomes wider, and
  • the worst outcome worsens and ultimately becomes negative (Covered in Red above)

This is how the risk and return approach should be assessed.

Here’s a short tweet to sum up Risk among all asset classes.

Subscribe to my newsletter here.

If you wish to get me ☕ or a 🍺 you can click here.

Get the latest post alerts directly on your WhatsApp and Telegram. Click on your preferred app name.

(Presently this post has been published by seeking special approval from Oaktree Capital. The confirmation of the approval is awaited.)

So what have you learned today?

How useful was this post?

Click on a star to rate it!

Average rating 4.3 / 5. Vote count: 6

No votes so far! Be the first to rate this post.

Did you love reading this post? Share the love ahead.

About the author

Saket Mehrotra

Number cruncher, avid reader, coffee connoisseur, book store hopper & Metallica fan. An active follower of Sensex since 2009. CA, CS by profession.

View all posts

Leave a Reply

Your email address will not be published. Required fields are marked *