The Most Important Thing by Howard Marks
Risk increases during upswings, as financial imbalances build up, and materializes during downswings.
Great investing requires both generating returns and controlling risk. Recognizing risk is an absolute prerequisite for controlling it.
Risk means uncertainty about which outcome will occur, and about the possibility of loss when the unfavorable ones do.
The process through which risk can be recognized for what it is: High risk comes primarily along with high prices. Participating when prices are high, rather than shying away, is the main source of risk.
Awareness of the relationship between price and value is an essential component of dealing successfully with risk. Dealing with risk starts with recognizing it.
Risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risks without being compensated for doing so, and risk compensation will disappear.
The degree of risk present in the market derives from the behavior of the participants.
Risks will be low only if investors behave prudently.
“The risk is gone” myth is one of the most dangerous sources of risk, and a major contributor to any bubble.
Investment risk comes primarily from too high prices, and too high prices often come from excessive optimism and inadequate skepticism and risk aversion.
The herd is wrong about risk, at least as often as it is about the return. A broad consensus that something is too hot to handle is almost always wrong. Investment risk resides most where it is least perceived and vice versa.
When everyone believes something is risky, their unwillingness to buy usually reduces the price to the point where it is not risky at all. All optimism has been driven out of its price.
Most investors think quality, as opposed to price, is the determinant of whether something is risky. High-quality assets can be risky, and low-quality assets can be safe, it is just a matter of the price paid for them.
Elevated popular opinion is the source of low return potential and high-risk.