During his recent interview with Bloomberg, Howard Marks explains why investors should think in terms of risk/reward and not good idea/bad idea. Here’s an excerpt from the interview:
Marks: After Milken and others arrived in 77-78, the new way of thinking was well it’s not a great company but the promised rate of interest is enough to compensate for the risk.
And for the last 45 years, and I think for the rest of time we don’t think of good idea/bad idea, we think risk/return, risk/return, how risky is it, is the promised return adequate to compensate for the risk. And that’s very important.
So the point is that the people who started to do this early… I was lucky to be asked to form a high yield bond fund by Citibank in ’78. The people who started doing it earlier could find places that people were saying oh no we wouldn’t touch that, that’s low grade.
And where you could get a high return without taking much risk. That was kind of a free lunch. Efficient markets tend to cause free lunches to go away but it was great to get there early.
You can watch the entire discussion here:
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