The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability — the reasoned probability — of that investment causing its owner a loss of purchasing power over his contemplated holding period.
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Investing is all about probabilities, and just because there appears to be a strong consensus prices are going to keep going up, doesn’t mean that is wrong, or right. The consensus does tend to be wrong at the turning points, being invariably bullish at the top and bearish at the bottom.
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Risk is when there are multiple possible future states and the probabilities of those different future states occurring are known.
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There has always been a considerable number of pathetic dopes who busy themselves examining the last thousand numbers which have appeared on a roulette wheel, in search of such a repeating pattern. Sadly enough, they have usually found it.
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You always need to be cognizant of six sigma events that can have ugly impacts on your portfolio and account for the approximate probabilities.
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Investing is not a discipline based on absolutes or precise mathematics. There simply aren’t enough data points available to work out the exact odds.
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Businessmen play a mixed game of skill and chance, the average results of which to the players are not known by those who take a hand.
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It is possible for an old, overweight ballplayer, whose legs and batting eye are gone, to tag a fastball on the nose for a pinch-hit home run, but you don’t change your line-up because of it.
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If you quantify, you won’t necessarily rise to brilliance, but neither will you sink to craziness.
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Many years ago, an older partner taught me to distinguish between outcomes that are unlikely and outcomes that are catastrophic. The latter are to be avoided even if the odds on them are tiny.
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In speaking of future prospects it is often difficult to make the distinction clear between what one considers the most desirable in the public interest and what one reckons to be the most probable in the actual circumstances. For unfortunately the course of events which is the most desirable is not always the most probable!
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The laws of probabilities tell us that almost anyone can achieve phenomenal success over any given measurement period. It is the task of those evaluating a money manager to ascertain how much of past success is due to luck and how much to skill.
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You will be right, over the course of many transactions, if your hypotheses are correct, your facts are correct, and your reasoning is correct.
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In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.
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Survival as an investor over that famous long course depends from the very first on recognition that we do not know what is going to happen. We can speculate or calculate or estimate, but we can never be certain.
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People do not care for the idea that any important activity which affects them is as beyond their control as a pair of dancing dice.
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If we assume that a very considerable amount of Wall Street activity must inevitably have elements of chance in it, then the sound idea would be to measure these chances as accurately as you can, and play the game in the direction of having the odds on your side.
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I think that we only get estimates of the distributions and that we can only be somewhat sure of the estimates. That makes the problems in the financial world much more difficult, I think, because you have these uncertainties in the distributions.
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Anybody that says that they see five and ten standard deviation events every couple of years is obviously not thinking correctly about probabilities.
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No matter how complete and accurate an analysis may be, there is always a possibility either of some new condition arising to belie your conclusions, or else of the market refusing to act in accordance with your just expectations.
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The security analyst can only give you certain hints as to what the solution is likely to be, certain indications of a range of value rather than a specific figure, and perhaps a diffident suggestion as to where within this range he believes the probabilities of the future will lie.
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