The Markets Have Much To Fret About, But Volatility Is Not Risk

Billionaire investor Howard Marks recently held a Q&A session on Quora where he answered several question on understanding market cycles. No coincidence that he’s just published a book on the subject — “Mastering The Market Cycle: Getting the odds on your side”

One of the questions posed was the following: When it comes to investing, how do you measure risk? This is a great question and one that I think most people only really start to think about when the stock-market slumps or their favourite tech stock has turned in poor earnings results. As Marks says at the start of his response, most people just think about the return they might make (emboldened text is Marks’).

The act of investing can be defined as forgoing consumption today to make money in uncertain ventures in the hope of increasing one’s ability to consume in the future. Thus investing entails making decisions regarding the future, even though the future can’t be known with confidence. It boils down to the conscious acceptance of risk in pursuit of return. Most people think about investing primarily in terms of the return they might make, but clearly there are not one but two important elements: return and risk. In other words, the amount of money made and the risk borne to make it. Both must be considered by any intelligent investor.

After roughly 50 years in the business, I’m convinced that risk is the more important, intriguing and difficult part of investing. Risk, not return, is what…