Summary of Howard Mark’s Memo on “Risk Revisited” Howard Mark has analyzed the risk and its incidence, in depth, while writing this memo to “Oaktree Clients’. This paper summarizes the memo, briefly, hereunder. Defining risk The memo is related to the risk involved in portfolio management. Writer suggests that the risk and its meaning cannot be detailed in the definite terms. He further records that Risk is different form volatility, when looking at the prospect of permanent loss that is associated with a particular event. While volatility is measurable, the risk is not quantifiable as happening of the related risk is also unpredictable.
According to the writer, the permanent loss is different from volatility and fluctuation, as they are temporary in nature and any portfolio holder can overcome such periodic disturbances. However, there is a need for the owner to hold the portfolio for a longer time, until the fluctuation is over. The only quantification of a risk can be through prediction of a fall in portfolio value to the maximum level, under the most unfavorable circumstances. However, prediction of the circumstances and the level of adversity is next to impossible.
Hence, the risk associated with such adverse situations cannot be determined in mathematical terms. The author has provided the example of chances for getting rains. The rains may be predictable but the quantity of the water falling down on the region remains unpredictable. Similarly, risks can happen, but the quantity of risk involved in such event is not measurable. .(Marks, nd) Future remains unknown Although many investment mangers and economists may pretend to know the future, in reality no body can predict what is going to happen during next hour or in the near future.
While the author justifies such inability to predict future, he has provided the reasons for this belief. Referring to the concept of ‘known unknowns’, the author indicates that we may be knowing that a certain risk can occur, but exact nature of same may remain unknown to us. For example, the implication of change in the government regulations can cause a particular risk to occur with the connected industry, however the nature and affect of such risk is known only after the announcement of policy decision. Then there are unknown risks, which are associated with the events that remain unpredictable.
For example, a natural calamity or a man-made disaster like Hiroshima bombing or 9/11 attack were not known or predicted before they occurred. (Marks, nd) Considering that future remains unknowable, investment strategies depend on the present circumstances and event/trends to decide about the future portfolio planning. The author suggests that future can be predicted taking into consideration a number of likelihoods and possibilities, which can help in arriving at the probability distribution of the outcome.
The risk is not going to occur if there is an existing knowledge about its occurrence. By nature, risks are unknown. However, risk and reward are related to each other. For example, a portfolio holder can hope to reap more benefits, if he is able to take higher risk. The investment, for those investors who are not prepared to take much risk, is largely safer. Risk may cause permanent loss of whole or partial portfolio value, depending on the amount of risk the holder is prepared to take.
Thus, risks can be partial or total, depending on the risk-ward ratio, opted by the holder. (Marks, nd) Works Cited Marks, Howard. (2004). “Risk Revisited. -- Oaktree Capital management”, Retrieved on Nov. 18, 2014, from: http: //writer. academia-research. com/file/get/instr/1160354/file/risk_revisited. pdf