Being wrong, missing out, volatility, permanent loss…risk gets defined too many ways. It’s true, and yet, risk is a little more complex than a simple definition when uncertainty is involved.

After reading through a few dozen pieces from Peter Bernstein, I’m fairly sure he had risk figured out as best as anyone can figure it out. Though he doesn’t offer a simple definition for risk – the first highlight below is a great soundbite to add to the list — he does deliver a better way to think about it in a broader sense.

What follows are some of Bernstein’s thoughts on risk that stood out most in what I read. Continue Reading…

When something you expect to happen, doesn’t happen, you get surprises. In markets, the result is an adjustment in prices. Some people might call it volatility.

Of course, volatility carries a negative connotation (confusing it with risk hasn’t helped its image either). I’ve heard nobody is comfortable around asset prices that jump around a lot. It’s apparently so bad, that people purposely build strategies to minimize it in their portfolio. Their goal: avoid surprises.

A smart contrarian might see it differently: volatility — surprises — are a feature of markets. Expectations are often wrong, unexpected things happen, prices adjust sometimes dramatically, which creates opportunities for those less fearful of volatility. In other words, embracing surprise leads to opportunity.

Suppressing volatility is no different than attempting to remove surprise from markets. It’s not only impossible but it — probably, eventually — leads to more of the thing you’re trying to avoid. How does it go — “Stability leads to instability.” Continue Reading…