The Most Important Thing Illuminated

Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion.

The riskiest things: The greatest risk doesn’t come from low quality or high volatility. It comes from paying prices that are too high. This isn’t a theoretical risk; it’s very real.

participating when prices are high rather than shying away is the main source of risk.

Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.

Maybe “worst-case” means “the worst we’ve seen in the past.” But that doesn’t mean things can’t be worse in the future. In 2007, many people’s worst-case assumptions were exceeded.

A portfolio can be set up to withstand 99 percent of all scenarios but succumb because it’s the remaining 1 percent that materializes. Based on the outcome, it may seem to have been risky, whereas the investor might have been quite cautious. • Another portfolio may be structured so that it will do very well in half the scenarios and very poorly in

The most common bell-shaped distribution is called the “normal” distribution. However, people often use the terms bell-shaped and normal interchangeably, and they’re not the same. The former is a general type of distribution, while the latter is a specific bell-shaped distribution with very definite statistical properties.

“There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.” That’s one of the most important things you can know about investment risk.

the future were knowable by all, investing wouldn’t be very challenging (or, consequently, very profitable). Because it’s not, my final key theme surrounds the importance of understanding uncertainty. The graphic above illustrates the essence