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if you take an area like investing and you try to make it seem easy you're really doing people a disservice if we said to people you know you really spent some time on it you could do your own Dentistry or your own legal work or fix your own car you know we wouldn't be doing people a favor and the same is true with Investing For some reason while nobody does their own Dentistry or auto repairs everybody thinks they can be an investor now I think there are two among the 21 most important things I think two are really the most important except for the others and and they are number one risk and controlling risk because I think that controlling risk is the mark of a professional anybody can make money when the market goes up and most of the time the market goes up and anybody who who takes above average risk can do above average when the market Rises so achieving returns is not a point of Distinction in Good Times in my opinion the distinction of a superior investor is achieving returns in good times with the risk under control because you never know when the environment is going to shift from favorable to unfavorable and the question is are you prepared if the Market's up 10 and you're up 12 and the Market's down 10 and you're down 12 you didn't accomplish anything the question is can you make more in the good times than you give back in the bad times and then I think the other thing that's most important is the cycle and where we stand in it I don't believe in predicting the future we never know where we're going we should understand the present and where we are in the present where the market is relative to its cycle tells you something about the odds that govern the future doesn't tell you what's going to happen tomorrow but I believe that since the world is an uncertain Place filled with Randomness we can't know what's going to happen in the future but those of us who see the world more clearly than others can have a superior understanding for the probability distribution that governs the future what things can happen which are most likely which are somewhat likely which are unlikely if you have that consistently you are a superior understander and you can be a superior investor so I think the question is what today is the probability distribution that governs the future the future investment performance in particular for me is like a bowl full of lottery tickets you never know which ticket's going to be chosen sometimes the bowl has 70 winning tickets and 30 losing tickets sometimes it has 70 losing tickets and 30 winning tickets wouldn't it be nice to know the difference I think it's possible but when it's 70 winners and 30 lose you want to go all in you want to invest heavily in aggressive Securities and you reach into the bowl or maybe the gods of Fate reach into the bowl and they pull out a ticket and it's a loser the future does not exist the future is only a range of possibilities it's not like there's some event in the future which is going to happen and that event exists in Prospect today and it's predictable there are lots of different things that can happen in the future and we have to understand that in large part outcomes will be governed by lock and Randomness number one don't know what the future holds can't know what the future holds shouldn't behave as if you can know what the future holds and when you look at past events you see there's a tendency to say well yes the future is indeterminate it hasn't happened yet but the past is over that's history but the point is that the past was in large part determined by luck and our industry is full of people who got famous for being right once in a row when you couple that fact with the fact that much of History was the product of Randomness then you understand that history may not tell us anything you look at the record of an investor who had a great year it doesn't mean he was he was a great investor it means maybe he got lucky maybe he took an outrageous position in his portfolio and was favored because something that had no right happening happened improbable things happen all the time and likely things fail to happen all the time so when you see a result you don't know if it was law for skill until you see the long string if somebody can make decisions 100 decisions and get 70 of them right or 80 over a long period of time then you can start to believe that it's skill and not luck but you know I think that there are three ingredients in success aggressiveness timing and skill and if you have enough aggressiveness at the right time you don't need more skill in the long run lock and especially the luck of good timing gets washed out and that's when skill comes to the surface most things especially things involving people are governed by cycles and you know the economy Cycles constantly the life cycle of businesses the markets are cyclical yet repeatedly people commit the mistake of thinking that Trends will go on forever in One Direction trees will grow to the sky that something can be worth a little and that means it's going to go to zero and these are when the biggest errors are committed by investors as things get better and as prices rise in recognition of that people extrapolate that and they get more excited as things rise and want to buy them more people get more depressed as Things fall and want to sell them more which is just the opposite of what you should do risk and safety have nothing or little to do with asset quality you know the lesson from that is that there's no such thing as a sure thing my dad used to tell the story about the inveterate Gambler who you know always lost rent money at the track and finally heard about a race with one horse he went out he bet all his money and halfway around the track the horse jumped over the fence and ran away the point is that there is no sure thing and there's certainly no sure thing in investing and when you hear about a sure thing the best thing to do is run the other way I was asked by the New York Times to write an article about the cause of the crisis they asked a dozen people and as you might imagine they got a dozen answers and my answer was an article called too much trust too little worry and basically in the Years immediately leading up to the crisis 0.56 and early seven people came to believe that risk had been banished and that the combination of the adroit fed which could fix any problem and the wonderful invention of Wall Street in securitizing tranching and selling onward had eliminated risk and had sliced and diced it so finely and spread it so broadly that there really wasn't much risk left so people stopped worrying about losing money risk aversion is the key element that keeps the market honest and sane and when people are risk-averse they will do extensive due diligence they will apply conservative assumptions they will demand compensation for bearing risk and all of these things are very helpful but when they forget to be risk averse and they drop their due diligence they stopped being conservative in their assumptions they stopped demanding protective covenants and adequate returns and risk premiums and then prices get too high relative to reality and that's when you get a bust
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