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The Most Important ThingUncommon Sense for the Thoughtful Investor$
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Howard Marks

Print publication date: 2011

Print ISBN-13: 9780231153683

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231153683.001.0001

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The Most Important Thing Is … Understanding Risk

The Most Important Thing Is … Understanding Risk

(p.31) 5 The Most Important Thing Is … Understanding Risk
The Most Important Thing

Howard Marks

Columbia University Press

This chapter asks about a further important requirement for successful investing: understanding risk. Dealing with risk is an essential element in investing. It is not hard to find investments that might go up. But the investor is unlikely to succeed for long if they haven't dealt explicitly with risk. The relationship between risk and return can be depicted in a graphic representation that shows a “capital market line” that slopes upward to the right, indicating the positive relationship between risk and return. Investment risk comes in many forms, from falling short of the goal to underperformance, career risk, unconventionality, and illiquidity. This chapter explains what gives rise to the risk of loss and how risk is measured. It argues that risk can be judged only by sophisticated, experienced second-level thinkers.

Keywords:   risk, investment, return, capital market line, underperformance, unconventionality, illiquidity, loss, second-level thinkers

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