Howard Marks Releases Memo: 'The Indispensability of Risk'

Guru discusses the role of risk and sacrifice

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Apr 19, 2024
  • The legendary investor compares the sacrifices made in chess to taking on risk in investing.
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In one of his famous “memos” released on April 17, renowned investor Howard Marks (Trades, Portfolio) discussed the part risk has to play in investing.

The paper, titled “The Indispensability of Risk,” began with the guru describing how sacrifice in the game of chess can relate to risk in investing. As outlined by Maurice Ashley in his article, “Chess Teaches the Power of Sacrifice,” Marks noted that “sacrifice” is defined as “intentionally losing a piece as part of one's gameplan.”

He continued by showing how the analogy is relevant, noting, “Buying a 10-year U.S. Treasury note is a modest or ‘sham' sacrifice. You give up the use of your money for 10 years, but that's only an opportunity cost, and accepting it brings the certainty of interest income. Most other investments involve real sacrifices, though, where the risk of loss is borne in pursuit of ‘gains that are neither immediate nor tangible.'”

The guru went on to explain how risk is an indispensible part of the investment process, regardless of whether you wish to avoid it, minimize it or take on a high degree of uncertainty in exchange for potentially substantial gains.

He then discussed how investors should think about risk-taking, saying they “must accept that success is likely to stem from making a large number of investments, all of which you make because you expect them to succeed, but some portion of which you know won't.”

Wrapping everything up, Marks concluded that you cannot expect to make money without taking on any risk.

Read Marks' full memo here.


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