Howard Marks On Managing Risk And The Ten Percent Solution

Oaktree Capital Management chairman Howard Marks isn’t a big fan of the conventional treatment of volatility and risk as being one and the same. That’s not to say Oaktree doesn’t use Sharpe ratios and other statistical measures of risk in their business, they do, but volatility doesn’t really capture the quality that we are trying to avoid when we do risk management.

“I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, ‘The prospective return isn’t high enough to warrant bearing all that volatility.’ What they fear is the possibility of permanent loss,” writes Howard Marks. “The probability of loss is no more measurable than the probability of rain. It can be modeled, and it...