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:
In investing, tortoises tend to win far more often than hares over the turns of the market cycle. — Source
***
The greatest tragedies occur when people forget about uncertainty. — Source
***
It is not the market that is rising or falling at any moment, even if we commonly speak as though it were. In truth, prices move in response to the buying and selling decisions of countless investors, who are constantly considering the likely decisions of countless others. — Source
***
Investing for the long run works only as long as people don’t believe it. — Source
***
Risk management means protecting oneself from the adverse and unexpected decisions others may make and, in the process, making better decisions than they do. — Source
***
Prices change when events are different from what the market has expected them to be. — Source
***
Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements. — Source
***
Survival is the only road to riches. — Source
***
Humility is an enormously important quality. You can’t win without it. Survival in the end is where the winners are by definition, and survival begins with humility. — Source
***
Consequences, not probabilities, determine the decisions that matter. — Source
***
The constant lesson of history is the dominant role played by surprise. Just when we are most comfortable with an environment and come to believe we finally understand it, the ground shifts under our feet. — Source
***
The trick in risk management is in recognizing that normal is not a state of nature, but a state of transition and that trend is not destiny. — Source
***
Managers do not create large alphas by being conventional. They do so by taking the risk of being wrong and alone. — Source
***
While we can learn from the long run about how bonds and stocks respond to changing environments and to each other, the long run can tell us perilously little about what kinds of environments lie ahead. — Source
***
Even the most serious efforts to make predictions can end up so far from the mark as to be more dangerous than useless. — Source
***
I view diversification not only as a survival strategy but as an aggressive strategy, because the next windfall might come from a surprising place. — Source
***
There is evidence that the stock market is more efficient in processing information about what other investors are doing than it is in processing fundamental information about the underlying assets, which is why stock prices so often turn out with hindsight to have been crazy rather than rational. — Source
***
The biggest risk is not knowing what you are doing. — Source
***
The fact is that strategies that perform sub-optimally under certain market conditions can work surprisingly well in others. — Source
***
Markets are shaped by what I call “memory banks.” Experience shapes memory; memory shapes our view of the future. — Source
***
Risk means the chance of being wrong — not always in an adverse direction, but always in a direction different from what we expected. — Source
***
The times I have been most wrong are the times I thought I was most right. — Source
***
The greatest risks are the risks that we don’t see and the most difficult problem is in preparing in advance for that kind of thing. — Source
***
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. — Source
***
What’s comfortable is not the right way to invest. You must own things that you’re uncomfortable with. Otherwise you’re not really diversified. — Source
Check out more Peter Bernstein quotes.
Last Call
- The Four Horsemen of Investing – D. Phillips
- Twenty Lessons Learned – Irrelevant Investor
- A Few Beliefs – M. Housel
- Price Anchoring and Broken Stories – Young Money
- So What?! – The Better Letter
- In Search of a Steady State: Inflation, Interest Rates and Value – Musings on Markets
- Betting on the Longshot – Daily JSTOR
- The Ethics of Indexing Redux – D. Nadig
- Jim Grant: Rising Interest Rates Are the Kryptonite of Financial Assets (podcast) – The Long View
- The Korean Immigrant and Michigan Farm Boy Who Taught Americans How to Cook Chow Mein – Taste
