Mastering the Market Cycle: Getting the Odds on Your Side, is book written by legendary investor and co – founder of Oaktree Capital Management, Howard Marks. As the book’s title implies, its emphasis is mostly on different market cycles and how to make them work for you. But the book also contains many other market wisdom, such as his opinion on uncertainty and risk in markets.
Uncertainty and Risk in Markets:
In Mastering the Market Cycle, Howard Marks writes:
“Since (a) investing consists in dealing withe future but (b) the future isn’t knowable, that’s where the risk in investing comes from. If future events were predictable, investing would be easy and profit would be sure.”
The future can not be predicted. And because so many variables can influence the future and hence, the markets, there will always be risk in investing / trading. The risk lies in the uncertainty.
If the future was known, trading would be easy because risk would be eliminated and everyone would be doing it. This means everyone would form similar / the same opinions about markets which would remove the point of speculation and the ability to make money from the markets.
He goes on to say:
“Since risk (that is, uncertainty with regard to future developments, and the possibility of bad outcomes) is the primary source of the challenge in investing, the ability to understand, assess and deal with risk is the mark of the superior investor and an essential – I’m tempted to say the essential – requirement for investment success.”
If you can truly internalize that you cannot predict the outcome of any one trade (the future), and that you understand that your strategy’s edge (proven edge) will be expressed over a large sample of trades, you will be way ahead of many traders / investors.
This means that your judgement does not get influenced from one trade to the next. This is what Mark Douglas tried to convey with his 5 Fundamental Truths of Trading and the concept of thinking in probabilities.
Finally:
I truly believe that if you can accept that you cannot predict the future and therefore all trades comes with risk (of loss) no matter how great your strategy, you are well on your way to becoming a successful trader.
Thanks so much for reading.
Trading SOS SOS