Marks vs. Buffett on Risk
high confidence — compiled with source citation from the investment brain.
Marks vs. Buffett on Risk
Marks vs. Buffett on Risk
howard-marks and warren-buffett converge on the same rejection — that risk is not volatility — but they arrive at it from opposite institutional vantage points. Both define risk as the possibility of losing money, not the wiggle of a price; where they diverge is in what follows. See permanent-loss-of-capital and risk-vs-uncertainty.
The shared target: volatility-as-risk
Buffett states the rejection plainly, against the academic convention. In the 1993 letter he writes that he defines risk, using dictionary terms, as the possibility of loss or injury, while academics define investment risk differently — as "the relative volatility of a stock or portfolio of stocks." The punchline is delivered as a principle of reasoning, not just of taste: "It is better to be approximately right than precisely wrong."
Marks makes the identical move from the practitioner side. "I don't think risk is synonymous with volatility." In the 2006 memo that became a chapter of The Most Important Thing, he argues that the academicians settled on volatility as a proxy because they needed a number — objective, historically ascertainable, extrapolatable — and that, among the many kinds of risk, volatility may be the least relevant of them all; what investors actually fear is losing money or earning an unacceptably low return, not price fluctuation.
Where they diverge: the investor's posture toward the wobble
Buffett's conclusion is that the true owner of a business should welcome volatility. "In fact, the true investor welcomes volatility" he writes, because a wildly fluctuating market periodically attaches irrationally low prices to solid businesses, and it is impossible to see how such prices "can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly." His real risk test is not a beta but whether the business and its management can be evaluated with certainty, and whether the investor will, over the holding period, retain purchasing power plus a modest return.
By 2014 Buffett extended the point to the whole asset-class debate. Reviewing fifty years in which the dollar lost most of its purchasing power, he called the conclusion unconventional but inescapable: it had been far safer to own a diversified collection of American businesses than to hold dollar-denominated securities such as Treasuries, and he warned that volatility is far from synonymous with risk — that the formulas which equate the two lead students, investors and CEOs astray.
Marks, running a credit shop that must survive mark-to-market and funding stress, is more solicitous of the path. He concedes volatility is not the risk most investors care about, yet he treats it as one signal among many that risk is rising or falling — his answer to the question of what risk is, if not volatility, is a loss-oriented definition plus a reminder that risk is subjective, personal, and hidden until it shows up. His concern is that risk cannot be measured after the fact and is invisible precisely when it is highest.
The operational difference
The gap shows up in how each manages the risk he defines. Buffett's answer is a concentration-and-conviction policy: a policy of portfolio concentration "may well decrease risk if it raises ... both the intensity with which an investor thinks about a business and the comfort-level he must feel." He is willing to make a macro-sized commitment with no certainty, because "you pay Charlie and me to use our best judgment" — not to avoid embarrassment. And he keeps risk control at the top rather than delegated: "Charlie and I believe that a CEO must not delegate risk control. It's simply too important."
Marks's answer is the opposite temperament — diversification, humility about prediction, and a standing assumption that you cannot know the future. The two thus end up describing the same hazard from a margin-of-safety tradition but prescribing different defensive postures: Buffett the concentrated owner who ignores quotes, Marks the diversified allocator who watches for the moment when risk changes. The contrast is the same one drawn at quality-vs-statistical-cheap, applied to risk rather than to security selection.
Sources
berkshire-hathaway/Letters-Markdown/1993 - Letter to Shareholders.mdhoward-marks/Memos-Markdown/2001-07-11 - Whats It All About Alpha.mdhoward-marks/Memos-Markdown/2006-01-19 - Risk.mdberkshire-hathaway/Letters-Markdown/2014 - Letter to Shareholders.mdberkshire-hathaway/Letters-Markdown/1997 - Letter to Shareholders.mdberkshire-hathaway/Letters-Markdown/2009 - Letter to Shareholders.md