Benjamin Graham
“The essence of investment management is the management of risks, not the management of returns.”
When my parents’ friends or fellow students in the School Investing Club talk about investing, they often ONLY talk about returns. “My portfolio returned X% last year” or “I just beat the S&P 500” are the kinds of statements I hear all the time, and rarely do people consider the risks they are taking, which is a big miss.
Risk matters. Returns discussed without the context of the risk levels taken might be eye-catching but are meaningless. One needs to consider returns on a risk-adjusted basis, always. If one barely beats the S&P 500 but takes on two times the risk, that is clearly not good, especially over the long-term, when risks tend to materialize. Could one be lucky over the short term and have a highly risky portfolio that performs well? Of course. However, as we have learned, over time, risks are real, shocks like the Global Financial Crisis are real, and there is “no free lunch.”
So, I think the bright old Benjamin Graham is right – risk management is the essence of Investment Management. The next time you hear someone rave about their returns, ask them about the riskiness of their portfolio. You might not be pleasantly surprised; many people don’t even know what risks they are taking on. And in that case, perhaps they are not truly investing; perhaps they are merely speculating.
Links to Further Reading:
Asymmetry Observations https://asymmetryobservations.com/2013/08/18/the-essence-of-investment-management-is-the-management-of-risks/
Risk Management: Unveiling its Significance https://moneymitra.com/post/Risk_Management_Unveiling_its_Significance/
