11-11-2013, 07:23 PM
Chapter 5: Defining Your Investment Goals
Chapter 5 is a very short chapter that really just sets up the next portion of the book. The chapter only makes a couple of points, which are not really aimed at helping you determine “your” specific investment goals, as the chapter title suggests.
Rather, Klarman argues that loss avoidance should be the primary goal of every investor. This is not to say that investors should park all their cash in the mattress and take no risk whatsoever, but rather that investors need a clear and consistent understanding of how to assess and use risk. On page 86, he writes:
Teasing the next chapters, Klarman asserts that only value investing properly focuses on the avoidance of loss and assessment of risk.
Chapter 5 is a very short chapter that really just sets up the next portion of the book. The chapter only makes a couple of points, which are not really aimed at helping you determine “your” specific investment goals, as the chapter title suggests.
Rather, Klarman argues that loss avoidance should be the primary goal of every investor. This is not to say that investors should park all their cash in the mattress and take no risk whatsoever, but rather that investors need a clear and consistent understanding of how to assess and use risk. On page 86, he writes:
Quote:Rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk. Treasury bills are the closest thing to a riskless investment; hence the interest rate on Treasury bills is considered the risk-free rate. Since investors always have the option of holding all of their money in T-bills, investments that involve risk should only be made if they hold the promise of considerably higher returns than those available without risk. This does not express an investment preference for T-bills; to the contrary, you would rather be fully invested in superior alternatives. But alternatives with some risk attached are superior only if the return more than fully compensates for the risk.
Teasing the next chapters, Klarman asserts that only value investing properly focuses on the avoidance of loss and assessment of risk.