When thinking about risk, rather than making things unnecessarily complicated, there are really two main things you should want to know about an investment strategy: 1. What is the risk of losing money following that strategy over the long term? 2. What is the risk that your chosen strategy will perform worse than alternative strategies over the long term?
So one way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety. The upside, while still difficult to quantify, will usually take care of itself. In other words, look down, not up, when making yo
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