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The Most Important Thing IlluminatedUncommon Sense for the Thoughtful Investor$
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Howard Marks

Print publication date: 2013

Print ISBN-13: 9780231162845

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231162845.001.0001

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The Most Important Thing Is … Recognizing Risk

The Most Important Thing Is … Recognizing Risk

(p.57) 6 The Most Important Thing Is … Recognizing Risk
The Most Important Thing Illuminated

Howard Marks

Columbia University Press

This chapter presents something which is very crucial for successful investing: recognizing risk. Investment risk comes primarily from too-high prices that often come from excessive optimism as well as inadequate skepticism and risk aversion. Recognizing risk is an absolute prerequisite for controlling it. Too-high prices come from investor psychology that is too positive, and too-high investor sentiment often stems from a dearth of risk aversion. The market is a responsive, not a static, arena shaped by investors’ own behavior. The investors’ increasing confidence creates more that they should worry about, just as their rising fear and risk aversion combine to widen risk premiums at the same time as they reduce risk. This is called the “perversity of risk”. The chapter presents comments and insights from four famous investors and investment educators.

Keywords:   risk, investment, price, risk aversion, psychology, investors, perversity of risk

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