“Risk-Adjusted Returns Matter”

A portfolio must be judged on risk-adjusted return. Graham uses a simple analogy to expose the flaw in believing that risk does not matter if incredible returns are evident within a portfolio.

“To see why temporarily high returns don’t prove anything, imagine that two places are 130 miles apart. If I observe the 65-mph speed limit, I can drive that distance in two hours. But if I drive 130 mph, I can get there in one hour. If I try this and survive, am I “right”? Should you be tempted to try it, too, because you hear me bragging that it “worked”? Flashy gimmicks for beating the market are much the same: In short streaks, so long as your luck holds out, they work. Over time, they will get you killed.”

– “The Intelligent Investor” By: Benjamin Graham