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Friday, April 27, 2012
Monday, February 27, 2012
The Elusive Concept "RISK"
Lets define Risk. Don't take my word for it...below are three striking similar comments from three investors, with multi decade track records, about risk.
"The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a non fluctuating asset can be laden with risk.” – Warren Buffet, 2/2012
“Remember too that for those great opportunities to avoid pain or make money – the only investment opportunities that really matter – the numbers are almost shockingly obvious: compared to a long term average of 15 times earnings, the 1929 market peaked at 21 times, but the 2000 SP 500 tech bubble peaked at 35 times! Conversely the low in 1982 was under 8 times. This is not about complicated math.” – Jeremy Grantham, 2/2012
“Rather than volatility, I think people decline to make investments primarily because they’re worried about a loss of capital or an unacceptably low return. The me, “I need more upside potential because I’m afraid I could loose money” makes an lot more sense than “I need more upside potential because I’m afraid the price may fluctuate.” No, I’m sure “risk” is – first and foremost the likelihood of losing money.” - Howard Marks, 2/2006
Monday, January 9, 2012
Land of Fat Tails
Unpredictability and Uncertainty...compounded by higher probability of extreme events.
We think usually of bell shaped distribution where average outcomes are clustered around the average, with an extremely low probability of extreme events. We are moving towards a bi-modal distribution that has implications for how to invest (not what you invest in).
Europe - Europe can no longer kick the can. They go one of two ways...fragmentation, deflation, etc...or strengthen the Euro zone and change its construct.
This applies to risk and opportunity.
Underlying characteristics are changing - consider that interest rate risk is changing into credit risk.
The FED's tools are not sufficient to stimulate growth or improve employment. Now, the Fed is using communication to push investors to take more risk. The problem is the disagreement amongst FED members and second their are real costs associated with the strategy of encouraging risk. The FED alone cannot solve this - the FED is at best acting as a bridge (with the bridge not functioning properly either).
The FED cannot produce the desired outcomes - with signficant risk that the FED can produce un-desired outcomes.
Key Euro Issues:
1. "Re-Founding" Eurozone by Germany and France
2. Counter fragility of banks
3. Mix debt containment with growth
4. Burden sharing of insolvent debtor sovereigns
Key US Issues
1. Can the US withstand economic weakness in Europe and European financial pressure. There is a very low probability that the US totally withstands Euro weakness
Big macro themes tend to be indiscriminate - they affect things universally - so macro uncertainty leads to paralysis - which creates opportunity to be offensive.
We think usually of bell shaped distribution where average outcomes are clustered around the average, with an extremely low probability of extreme events. We are moving towards a bi-modal distribution that has implications for how to invest (not what you invest in).
Europe - Europe can no longer kick the can. They go one of two ways...fragmentation, deflation, etc...or strengthen the Euro zone and change its construct.
This applies to risk and opportunity.
Underlying characteristics are changing - consider that interest rate risk is changing into credit risk.
The FED's tools are not sufficient to stimulate growth or improve employment. Now, the Fed is using communication to push investors to take more risk. The problem is the disagreement amongst FED members and second their are real costs associated with the strategy of encouraging risk. The FED alone cannot solve this - the FED is at best acting as a bridge (with the bridge not functioning properly either).
The FED cannot produce the desired outcomes - with signficant risk that the FED can produce un-desired outcomes.
Key Euro Issues:
1. "Re-Founding" Eurozone by Germany and France
2. Counter fragility of banks
3. Mix debt containment with growth
4. Burden sharing of insolvent debtor sovereigns
Key US Issues
1. Can the US withstand economic weakness in Europe and European financial pressure. There is a very low probability that the US totally withstands Euro weakness
Big macro themes tend to be indiscriminate - they affect things universally - so macro uncertainty leads to paralysis - which creates opportunity to be offensive.
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