“If you read Howard Marks, Co-Chairman of Oaktree’s June 8, 2015 client letter, “Risk Revisited Again”, two things are clear: First, allegations by the S.E.C. and private securities litigants that pre-crisis investors were fraudulently tricked by issuers and underwriters into buying securities (mortgages, financial firms, etc.) as a result of misleading and omitted disclosures is a false narrative. It didn’t happen……..

…and was also never proven in Court (that I am aware). Second (and related), the future is unknowable, risk cannot be quantified with any precision, and there is a big difference between probability and outcome. That’s what happened in the 2008 financial crisis. A very, very low probability event occurred that no prudent party (not the banks, mortgage lenders, the government, regulators, investors, rating agencies, Fannie, Freddie, HUD, FHA, or the FDIC) would have predicted and acted upon prior to it occurring. It’s only in hindsight that a bunch of lawyers said, “they all knew or should have known (what was going to happen in the future).” I think that was very wrong and un-American and I believe it’s had an adverse effect on risk-taking and the public securities markets (and therefore on our economy and jobs).”, Mike Perry, former Chairman and CEO, IndyMac Bank

“Given the near-infinite number of factors that influence developments, the great deal of randomness present, and the weakness of the linkages, it’s my solid belief that future events cannot be predicted with any consistency.”, Howard Marks, June 2015

Excerpts from Howard Marks June 8, 2015, “Risk Revisited Again”.

“Of course, the problem with defining risk as the possibility of permanent loss is that it lacks the very thing volatility offers: quantifiability.”

“The probability of loss is no more measurable than the probability of rain. It can be modeled, and it can be estimated (and by experts pretty well), but it cannot be known.”

“If you buy something for $10 and sell it a year later for $20, was it risky or not? The novice would say the profit proves it was safe, while the academic might say it was clearly risky, since the only way to make 100% in a year is by taking a lot of risk.”

“In life….and in investing….the biggest risks cannot be reduced to a hard number.”

“For these reasons, as Minsky puts it, stability leads inevitably to instability.”

“Shocks and surprises are what the history of investment is all about.”

“Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.”

“On the other hand, I’m solidly convinced the future isn’t knowable. I side with John Kenneth Galbraith who said, “We have two classes of forecasters: Those who don’t know….and those who don’t know they don’t know.””

“Given the near-infinite number of factors that influence developments, the great deal of randomness present, and the weakness of the linkages, it’s my solid belief that future events cannot be predicted with any consistency.”

“Here’s the essential conundrum: investing requires us to decide how to position a portfolio for future developments, but the future isn’t knowable.”

“It goes without saying that if we knew everything that was going to happen, there wouldn’t be any risk.”

“Risk means more things can happen than will happen.”, London Business School professor Elroy Dimson

“This uncertainty as to which of the possibilities will occur is the source of risk in investing.”

“Knowing the probability doesn’t mean you know what is going to happen.”

“The probability of rolling twelve (in backgammon) is thus only 1 in 36, less than 3%. But twelve does come up from time to time, and the people it turns into losers end up complaining about having done the “right” thing but lost.”

“As my friend Bruce Newberg says, “There’s a big difference between probability and outcome.”

“Unlikely things happen….and likely things fail to happen….all the time. Probabilities are likelihoods and very far from certainties.”

Posted on July 8, 2015, in Postings. Bookmark the permalink. Leave a comment.

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