Why This Fund Manager Doesn't Mind Volatile Prices
In my view, investors pay too much attention to volatility. It's absolutely essential for investors to think about limiting their risk, but I don't think volatility is the risk they should be most concerned with. There's no intrinsic reason for long-term investors to be concerned with volatility (as distinguished from the risk of permanent loss).
— Howard Marks
Howard Marks is one of the most respected investors active today. Through Oaktree Capital, he manages more than $200 billion and has delivered long-term returns of about 19% per annum net of fees.
In today's quote, Marks argues that investors obsess over volatility, but that it's the wrong indicator of risk. To sharpen his point, he cites Warren Buffett, who famously says he'd "rather earn a lumpy 15% return than a smooth 12%."
Marks blames "externalities," for making volatility feel like risk. These are factors outside of the investment process, like ego, emotion, or the pressure to justify results.
Because externalities affect investors in different ways, a volatile investment can be risky for some investors and not for others. If you believe in your investments and have a longer time horizon, ignore the price swings.
To learn more from Marks about how to think about investing, I recommend his fabulous book, The Most Important Thing. Or, read the Marks memo from which today's quote is taken.
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