The real value of history in the world of investing

William Bernstein writes in his classic Four Pillars of Investing – Lessons for building a winning portfolio: “The real value of the historical record is as a gauge of risk, not return.”

Still, majority of discussions focus on which asset class has outperformed or underperformed which other asset class. The focus is too much on the returns generated rather that the risks taken or avoided.

Read history to understand the risks. Read history to understand what can go wrong. Read history to understand what you can do to protect and nurture your investment portfolios.

#RidingTheRollerCoaster – 140

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Low risk – high returns: is it a problem?

In the words of Prof. Myron Scholes, “Well, our (LTCM’s) goal is to get the risk level of S&P 500. We are having trouble having it that big.”

The problem Long Term Capital Management (LTCM) was not about getting enough returns, but about having enough risk.

Something was missing here. The fund was generating extraordinary returns, without commensurate risks, as is evident from Prof. Scholes’ statement above.

Read more about the lessons from the LTCM episode in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

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