“In bull markets – usually when things have been going well for a while – people tend to say ‘Risk is my friend. The more risk I take, the greater my return will be. I’d like more risk, please.’ The truth is, risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so… and risk compensation will disappear. But only when investors are sufficiently risk-averse will markets offer adequate risk premiums. When worry is in short supply, risky borrowers and questionable schemes will have easy access to capital, and the financial system will become precarious. Too much money will chase the risky and the new, driving up asset prices and driving down prospective returns and safety.’
– Howard Marks, Oaktree Capital Management
*So here’s where Hussman leaves me wanting: What do you do when valuations suck and inflation risk is high? How do you hedge inflation?