Book Review: The Missing Risk Premium

In order to get more return, you have to take more risk, right?  Those of us who are value investors, or bond investors, have disagreed with this idea for years.  We get the best returns by avoiding risk.

A great part of of making money in investing is not losing money.  In order to avoid losing money, you have to buy assets that are cheap relative to their value, and intrinsically safe — i.e. what is the worst-case scenario?  Could I lose a lot if things go badly?

This book is two things: it is a teardown of modern portfolio theory as posited by the academics, and the establishing of a new theory that suggests that we get better returns by avoiding volatility of investment returns.

Here’s part of the problem: Scientists are human, just like you and me, and they occasionally defend wrong ideas because they propagated in a time where some novel but wrong papers/books were written, and seemed right at the time, and the consensus accepted them, because it agreed with their biases.

That’s what happened with modern portfolio theory.  The bias of the economists was “You have to take more risk to get more return,” when the reality is that taking more risk to get more return works up to a point, and after that, those buying volatile stocks, bonds, etc., are trying to hit “home runs,” and have lost track of risk control.  People don’t estimate well in high volatility situations, and tend to lose money as a result.

Think of it this way: if you want to be totally safe, invest in cash-like instruments.  You will earn nothing.  If you want to make some money, invest in a portfolio of stocks or bonds that are stable in terms of their market returns.  If you want to lose money, invest in volatile investments.  Most investors will not know the right time to buy or sell those investments.  It is too hard; leave it to the fools that want to take long-shot bets.  Gamblers don’t win in investing.

Low volatility investing is a proxy for safety, but also a proxy for neglect.  Many companies dwell in the shadows of the market.  No one follows them.  They may be big enough to be followed, but they are in an uncool industry, like insurance.  Or they represent an out-of-favor area, where only insiders/experts are quietly playing.

This is a good book for two reasons: it tells you to avoid the idealistic theories of the academics.  Second, it tells you that avoiding risk/volatility leads to better returns.

Most successful businessmen are in the middle. They take prudent risks.  This book may do this from a quantitative investment framework, but that is what it encourages.


The book needed a better editor, but so do most books.  We need more grammar, spelling and typo Nazis.

Who would benefit from this book:   There is not much math in the book, but there is a lot of discussion of academic papers on finance.  If discussion of academic papers on finance bores you, this is not for you.  If you can tolerate that, this is a very useful book for those that want to do better in investing.  If you want to, you can buy it here: The Missing Risk Premium: Why Low Volatility Investing Works.

Full disclosure: The author sent me a Kindle copy of the book, without my asking.

