Risk is the crux of any investment decision. Understanding it and pricing it. Failures occur when investors assessment of the future proves wrong.

Unfortunately, history never fails to rhyme; from the great depression to the great recession, from the South Sea to the Covid bubble. But risk taking is unavoidable, both in investing and in society. Indeed, despite repeated and frequent failures, risk taking should be encouraged.

Indeed, only by taking on risk and challenging convention can progress in knowledge, technology, and society be achieved. Without human’s risk taking and learning over the past 2000 years, we may still be inhabiting caves – in an arguably more uncertain predicament.

Scepticism may have saved investors from subprime mortgage bonds but may lead one to pass on an unproven Google. Investors of all stripes strive to find this equilibrium between risk and opportunity. Taking chances whilst managing risks.

Risk appetite also varies with time, circumstance, and opportunity. Some people are born risk takers, willing to fail repeatedly in their quest for outsized returns. Trialing new ideas, new technologies, and building the companies none thought were at all possible.

However, it is always easier to take more risk with other people’s money.

Others, careful with what they see as their hard earned assets, prefer investments with realistic outcomes, steady cash flows, and at least some level of certainty in value. But they may stay inert, never failing, but never quite succeeding.

In life, most people will take on some risks and avoid others; their appetites and objectives evolving over time. Investors and the markets are no different. Measuring opportunities on individual appetites, judgment, and experience. Seeking areas where they consider others have mis priced risk, or where potential returns match or exceed the levels they perceive to be fair.

The complex web of risk takers and avoiders creates the markets in which we buy, sell, and hold. This generating diverse markets in equity, debt, and alternatives, with active sub-markets for derivatives, hedging, credit default swaps and the like which allow investors to manage their risk – up until the point the music stops, when the markets fail.

Evaluating risk is always hard and always subjective. Circumstances can often shift these calculations over time leading to significant changes of view. The market gyrations of last three years temporarily rewarded those who took on far too much risk, while the reversion of 2022 reminded us of the dangers of myopia.

As a minimum, being a successful investor over the long term requires you must lose less than you gain. Diverging from the pack is a prerequisite for returns above the mean. Doing so means repeatedly taking on risks.

In the long term being “good” at risk assessment may well win out in terms of returns – but in the short term, somewhat frustratingly, it can often look better to be “lucky”. What is certain is that we will never know exactly what will come of any risk, the best laid plans frequently going astray.

In truth, only hindsight will reveal who wore the appropriate swimwear.