Charlie Munger about Risk

Charlie Munger ("Investment partner "of Warren Buffet) tips on Risk

-) “Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilize a very conservative patterns of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.”

“If we’d used the leverage that some others did, Berkshire would have been much bigger… But we would have been sweating at night. It’s crazy to sweat at night.”

There is no recipe or formula for investing or dealing with risk. Everyone has a unique tolerance for risk since we are all more or less comfortable with various factors that create it. Some people find it useful to have heuristics (rules of thumb) to guide them in assessing whether a comfortable level of risk tolerance exists. Whether you can sleep soundly at night is a one heuristic. If your investments are preventing you from getting a good night’s sleep it may be wise to adjust your portfolio so that it is consistent with a comfortable sleep.

Seth Klarman agrees with Charlie Munger on this point: “Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”

-) “[With] a lot of judgment, a lot of discipline and an absence of hyperactivity… I think most intelligent people can take a lot of risk out of life.”

The three best ways to reduce risk are diversification, hedging and buying with a margin of safety argues Seth Klarman. Making life less risky is also assisted greatly if you make fewer decisions in domains where you do not know what you are doing after doing a significant amount of thinking about the domain involved and the decision. Doing this requires discipline since we all make psychological and emotional mistakes. One technique for avoiding risk is to place decisions that fall in the domain of “I don’t know” into a “too hard” pile if you can.

Sometimes a decision is unavoidable and judgment will be required. Munger puts the investor’s objective simply: “What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often.”

original link:

extract / Seth Klarman (Blaupost Group): (.pdf points)