What Howard Marks Really Meant When He Said "Risk Cannot Be Measured"

Why everything Wall Street teaches about risk is backwards (and what the world's best investors focus on instead)

Schwar Capital

Jul 14, 2025

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Howard Marks dropped a bomb on the investment world when he declared that "risk cannot be measured."

Most people heard this and thought he'd lost his mind.

After all, isn't the entire financial industry built on measuring risk?

We have VaR models, beta calculations, standard deviations, and enough Greek letters to make Pythagoras dizzy.

But Marks wasn't having a senior moment.

He was pointing to something far more profound – and far more dangerous – about how we think about investing.

The Measurement Trap

Here's what most investors get spectacularly wrong:

They confuse volatility with risk.

Your fancy risk management system tells you that Stock A has a beta of 1.2 and Stock B has a beta of 0.8. Therefore, the system concludes, Stock A is riskier.

But Marks understood something that most MBA programs still refuse to teach:

Real risk isn't about daily price movements.

It's about the permanent loss of capital.

What Risk Actually Looks Like

Let me paint you a picture that would make any quantitative analyst break out in hives.

Two scenarios:

Scenario A: You buy a wonderful business at a fair price. The stock bounces around like a caffeinated kangaroo – sometimes up 20%, sometimes down 15%. Your risk models are flashing red. But the underlying business keeps growing earnings, expanding margins, and strengthening its moat.
Scenario B: You buy what appears to be a "stable" utility stock. It barely moves for months. Your risk measurements are practically purring with contentment. Then you discover the company has been cooking the books for years, hiding massive liabilities off the balance sheet.

Which scenario was actually riskier?

Your spreadsheet would say Scenario A.

Reality says Scenario B.

This is precisely what Marks meant when he said risk cannot be measured.

The biggest risks – fraud, disruption, permanent business decline – don't show up in your historical volatility calculations.

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The Illusion of Precision

There's something almost comical about watching Wall Street try to quantify the unquantifiable.

They'll tell you with mathematical certainty that your portfolio has exactly a 2.3% chance of losing more than 15% this quarter.

They'll present these numbers with the confidence of a Swiss watchmaker and the precision of a NASA mission.

But then 1987 happened.

And 2008.

And 2020.

And every other time the "impossible" became inevitable.

As Marks often points out, the most dangerous words in investing are "this time is different."

But equally dangerous are the words "the model shows..."

Understanding Marks' True Message

When Howard Marks says risk cannot be measured, he's not suggesting we throw up our hands and guess randomly.

He's making a far more sophisticated point: true risk assessment requires judgment, not just mathematics.

Here's what Marks advocates instead:

First, understand that risk is subjective. What's risky for one investor might be safe for another, depending on time horizon, financial situation, and investment knowledge.
Second, focus on what can be controlled. Market movements can’t be predicted, but quality businesses can be bought at reasonable prices.
Third, think in probabilities, not certainties. Instead of saying "this stock will return 12%," say "this investment has favourable odds of generating attractive returns over time."

So how do we invest when risk cannot be measured?

We start with quality. Marks didn't build Oaktree Capital by buying garbage and hoping for the best. He focused on businesses with durable competitive advantages, strong balance sheets, and competent management. We follow the same approach.

Next, we demand a margin of safety. If we can't measure risk precisely, we'd better build in some cushion. That's why we pay significantly less than what we think something is worth.

Finally, we diversify intelligently. Not the "own everything" approach that financial advisors love to peddle, but concentrated diversification among businesses we actually understand.

Remember: The goal isn't to eliminate risk – it's to take intelligent risks while avoiding catastrophic ones.

The Uncomfortable Truth

Here's what makes Marks' insight so uncomfortable for most investors: it requires humility.

It's much easier to believe your Excel spreadsheet has captured all possible risks than to admit you're operating with incomplete information in an uncertain world.

But the best investors – Marks, Buffett, Munger, Klarman – have always understood this.

They succeed not necessarily because they can measure risk better than everyone else, but because they understand the limitations of measurement itself.

They focus on what matters: buying quality businesses at reasonable prices and holding them for long periods.

Everything else is just noise.

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The Real Edge in Investing

At Schwar Capital, we've built our entire investment approach around these time-tested principles.

Rather than relying on complex models that pretend to measure what cannot be measured, we focus on identifying quality businesses trading at attractive prices.

If you're interested in learning more about our approach to risk management and quality investing, consider joining our growing community of thoughtful investors.

Because in a world where risk cannot be measured, the best defence is quality thinking and disciplined execution.

Until next week,

Dom
Schwar Capital

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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions. To read our full disclaimer, click here.