In my mind there three goals in investing: safety of principal (you work hard and sacrifice to save why throw it away), preserve the purchasing power of your savings (offset inflation), and grow you savings to improve you standard of living (both now by saving less and later by having more). The first two are much more important then the last one. The last one is the hardest thing to do and is a job that requires real skills. Those skills don’t come cheap.

If we think about the first two goals then the primacy of don’t take chances and weigh risks become apparent. By my way of thinking the first two goals also drive us to take a slightly different approach to investing. That is to evaluate our downside risk first. After all, the goal should be to maximize upside risk vs. downside risk to a position. There are two levers in that comparison. Limited downside risks leaves lots of opportunity for good things to happen. If I can’t determine the downside, how well am I going to determine the upside? If you’ve ever read anything Seth Klarman has produced or said then you would know that this is his view as well. Buffett and Marty Whitman as well.

I think one of the interesting aspects of the current market is that we have been able to see who really understands the importance of evaluating the downside. Bill Miller of Legg Mason comes to mind as somebody who got caught evaluating the downside risk incorrectly. My sense is that they mis-read the risks to the balance sheets. Without a good balance sheet value to work from the going concern business value and growth potential are much more complicated to value.