When we hear investors talk about their portfolio or favourite investment ideas, they’re natural optimists. They often focus on the potential upside of their investments – views on a business’ exciting prospects and why the investment will drive outsized returns in their portfolio. As a credit investor, I find my thoughts begin to drift during these conversations towards questions about why those positive outcomes might not happen or may take longer than expected to occur. Call me the pessimist in the room but I can’t help noticing that whenever investors talk about “risk-adjusted returns,” they never specify what “risk adjustments” are being made!

At EdgePoint, we define risk as the permanent loss of capital. We don’t define risk as price volatility like some finance textbooks would. We embrace volatility – it creates opportunities for us to take advantage of mispricings that allow us to buy future growth for free, and to position our Portfolios for greater go-forward returns. We believe that understanding the potential risks of an investment are just as important as understanding the possible rewards. Don’t just take our word for it. Warren Buffett once said: