Memo to: Oaktree Clients
From: Howard Marks
Re: Risk Revisited
© Oaktree Capital Management, L.P.
All Rights Reserved
To move to the biggest of big pictures, I want to make a few over-arching comments about risk.
The first is that
risk is counterintuitive
The riskiest thing in the world is the widespread
belief that there’s no risk
The second is that
risk aversion is the thing that keeps markets safe and sane
When investors are risk-conscious, they will demand generous risk premiums to compensate
them for bearing risk. Thus the risk/return line will have a steep slope (the unit increase in
prospective return per unit increase in perceived risk will be large) and the market should reward
risk-bearing as theory asserts.
The third is that risk -the possibility of loss-
often collides with negative events.
The fourth is that risk is multi-faceted and hard to deal with
. In this memo I’ve mentioned different forms
of risk: the risk of losing money, the risk of falling short, the risk of missing opportunities,
FOMO risk, credit risk, illiquidity risk, concentration risk, leverage risk, funding risk, manager risk, over-
diversification risk, risk associated with volatility, basis risk, model risk, black swan risk, career risk,
headline risk, event risk, fundamental risk,
valuation risk, correlation risk, interest rate risk, purchasing
power risk, and upside risk. And
I’m sure I’ve omitted some. Many times these risks are overlapping,
contrasting and hard to manage simultaneously.
At present
I
consider
risk control more important than usual. To put it briefly:
Today’s ultra low interest rates have brought the prospective returns on money market
instruments, Treasurys and high grade bonds to nearly zero.
This has caused money to flood into riskier assets in search of higher returns.
This, in turn, has caused some investors to drop their usual caution
and engage in aggressive
tactics.
And this, finally, has caused standards in the capital markets to deteriorate, making it easy for
issuers to place risky securities
and consequently hard for investors to buy safe ones.
Warren Buffett put it best, and I regularly return to his statement on the subject:
. . . the less prudence with which others conduct their affairs, the greater the prudence
with which we should conduct our own affairs.
Full Letter (16 pages)
http://www.oaktreecapital.com/memo.aspx 
Comments
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Based on a conservative valuation metric popular in the asset-management industry—that a bond firm is worth 1% of assets under management—DoubleLine would be valued today around $450 million. Yet given the stickiness of its mutual-fund assets and some higher-fee hedge-fund and joint-venture assets, the figure could be as much as $650 million."
http://online.barrons.com/news/articles/SB50001424053111904706204578002340208278334