Oddly, risk moves to the forefront of investor consciousness only when things are already going badly. Losing money is perhaps the only thing that makes most investors worry about losing money. With so much pressure for competitive short-term performance, worrying about what can go wrong may seem like a luxury. Ironically, when almost no one is focused on the downside, even a minor increase in investor perception of risk can trigger dramatic market declines.

While we believe it is crucial to worry about what can go wrong, unproductive worrying will not and cannot make a difference. Worrying that your favorite team will lose is obviously unproductive. Worrying that you might have an ulcer could even prove counterproductive. Productive worrying, on the other hand, enables you to identify action that reduces or eliminates the source of concern, often at little or no cost. Concerned that it might rain? Pack a raincoat and umbrella. Worried you will be late? Leave earlier than originally planned.

Successful investing goes hand in hand with productive worrying. Worried that a stock you hold might fall sharply? Reduce your holdings or buy some puts. Concerned that interest rates may rise or the dollar fall? Establish an appropriate hedge. Worried that the stock you bought on a tip might be a bad idea? Sell it and move on. Worry enough during the day and you can, in fact, sleep justifiably well at night.

All of us are subject to biases that can impair our objectivity in investment decision-making. Striving to overcome these biases is crucial for long-term investment success. Have we been too optimistic in our assumptions? Have we blindly ignored new information because we are clinging too tightly to our original thesis? Have we held onto an investment because it keeps going up, irrationally ignoring that it has become overvalued? Without a healthy dose of reflective worry, we are unlikely even to identify our lapses in judgment, let alone correct them. In other words, only by actively, productively, relentlessly worrying about what can go wrong can we maximize the odds that things will go right, by doing everything within our control to perfect our decision-making. You rarely, if ever, make money from worrying; it does not typically enhance return. But by avoiding loss, you are able to hang on to what you have accumulated, which is a cornerstone of successful investing.

Seth Klarman

Price and Value

For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.

When people say flatly, “we only buy A” or “A is a superior asset class,” that sounds a lot like “we’d buy A at any price … and we’d buy it before B, C or D at any price.” That just has to be a mistake. No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right.

– Howard Marks

Competing Against Less-Skilled Investors

The massive shift in asset allocation away from active investing towards passive investing exacerbates this effect. Thirty years ago, index funds were less than one percent of assets under management, and today they (along with other passive vehicles such as exchange-traded funds) are about one-third. Think of it this way: For you to have positive alpha, the industry’s term for risk-adjusted excess return, someone has to have negative alpha of the same amount. By definition, alpha for the market must equal zero (before fees).

So you want to compete against less-skilled investors because they are your source of alpha. It is disadvantageous for you if the weak players flee the market (selling their stocks and buying index funds), or if the least capable professional investors lose assets to passive funds, because it means that only the smartest investors remain in the active game. The truth is that weak players. whom the strong players require to generate excess returns, are fleeing at a record pace.

– Michael Mauboussin

What A Man Is

…what a man is contributes much more to his happiness than what he has, or how he is regarded by others. What a man is, and so what he has in his own person, is always the chief thing to consider; for his individuality accompanies him always and everywhere, and gives its color to all his experiences. In every kind of enjoyment, for instance, the pleasure depends principally upon the man himself. Every one admits this in regard to physical, and how much truer it is of intellectual, pleasure.

When we use that English expression, “to enjoy one’s self,” we are employing a very striking and appropriate phrase; for observe — one says, not “he enjoys Paris,” but “he enjoys himself in Paris.” To a man possessed of an ill-conditioned individuality, all pleasure is like delicate wine in a mouth made bitter with gall.

Therefore, in the blessings as well as in the ills of life, less depends upon what befalls us than upon the way in which it is met, that is, upon the kind and degree of our general susceptibility. What a man is and has in himself — in a word personality, with all it entails, is the only immediate and direct factor in his happiness and welfare. All else is mediate and indirect, and its influence can be neutralized and frustrated; but the influence of personality never.

– Arthur Schopenhauer