One simple definition of risk is that it's the "possibility of loss or injury." And that's generally how most of us think about it -- it's a bad thing that needs to be managed, minimized, and sometimes avoided all together.
While true, this recent memo by Howard Marks is a good reminder that risk is also indispensable. Or, put differently, there's risk in not taking enough risk. This is true in business and finance, but it's also true -- as Howard argues -- in chess, in sports, and in many other aspects of life:
The paradox of risk-taking is inescapable. You have to take it to be successful in competitive, high-aspiration arenas. But taking it doesn’t mean you’ll be successful; that’s why they call it risk.
By definition, it means that you will be wrong sometimes. Because if you couldn't possibly be wrong, then it wouldn't be a risk. It would be a known. And known things exist in our world in a very different way than uncertain things. Superior performance, as a gross generalization, demands uncertainty.
So what's the solution? Calculated risks:
You shouldn’t expect to make money without bearing risk, but you shouldn’t expect to make money just for taking risk. You have to sacrifice certainty, but it has to be done skillfully and intelligently, and with emotion under control.
