Peter Bernstein understood markets better than most. Decades of experience gave him an inside look at the complex interplay between investor behavior, risk, and uncertainty.

Bernstein knew that realized risk was a byproduct of investors’ behavior. Behavior that is often driven by our experiences or lack thereof.

Investors usually go wrong the moment they are certain of what comes next. Probabilities, not absolutes, are the best tools we have to make investment decisions. Yet, the riskiest moments in markets are when investors en masse expect a similarly certain future.

Bernstein knew that risk results from not knowing the future. Uncertainty rules but risk isn’t always a bad thing. Surprises happen both good and bad.

Risk is simply the outcome we don’t expect. The question to ask, according to Bernstein, is what if you’re wrong? Are you prepared for the consequences of that?

Survival is key. So risk is something to be protected against and diversification is the answer. But in so doing, diversification seizes surprising opportunities elsewhere.

Most important, Bernstein had a way with words. His talent to simplify complex ideas, like those above, into a short sentence or two was impressive. I thought I’d share a few.

Here’s Bernstein: Continue Reading…