AI summary and analysis
Marks' classic risk control memo: Investors cannot reliably predict events, but they can improve their survival probability through portfolio structure, risk budget and psychological preparation.
Key points
- The core idea is to change investment from a prediction game to a preparation game, admitting that the future is unknowable, but it does not mean that nothing can be done.
- Preparation includes diversifying risks, avoiding excessive leverage, maintaining liquidity, reducing the probability of permanent loss, and setting response principles in advance.
- This memo is particularly useful to ordinary investors because it pulls risk management away from complex models and back to behavior and structure.
- Marks's view of risk is not to always be defensive, but to give the portfolio the ability to withstand bad results and seize subsequent opportunities in an uncertain environment.
- It is one of the classic entries into Oaktree's investment philosophy and should be displayed together with "Sea Change" and "The Most Important Thing".