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Risk and Asset Quality: Lessons from Howard Marks

Risk is not a function of asset quality which sounds counterintuitive as it defies the general belief that assets with higher quality have lower risk and vice versa. 

Howard Marks joined the investment management industry in Sep’1969. His organisation and many other firms engaged in nifty 50 investment. They invested in the fifty best and fastest-growing companies in America. The belief was that nothing bad could happen to those companies. But they were priced so high that anyone invested in those fifty best companies in Sep’1969 would lose more than 90.0% of their money in the next five years. 

Then Howard Marks left the world of equities in 1978 and got the responsibility to invest in high yield bonds, bonds of companies that were struggling in business and perceived to be of lowest quality. He made money steadily and safely on those lowest quality bonds. 

The lessons from this is that asset with the highest quality doesn’t guarantee return if the price paid for it is too high and asset with the lowest quality can be cheap enough that it offers steady return without much risk incurred. 

“It’s not what you buy, it’s what you pay. Investment success doesn’t come from buying good things, but from buying things well.” - Howard Marks  

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