Howard Marks on the balance between offense and defense

From The Most Important Thing:

A conscious balance must be struck between striving for return and limiting risk— between offense and defense. In fixed income, where I got my start as a portfolio manager, returns are limited and the manager’s greatest contribution comes through the avoidance of loss. Because the upside is truly “fixed,” the only variability is on the downside, and avoiding it holds the key. Thus, distinguishing yourself as a bond investor isn't a matter of which paying bonds you hold, but largely of whether you’re able to exclude bonds that don’t pay. According to Graham and Dodd, this emphasis on exclusion makes fixed income investing a negative art.

On the other hand, in equities and other more upside-oriented areas, avoiding losses isn't enough; potential for return must be present as well. While the fixed income investor can pretty much practice defense exclusively, the investor who moves beyond fixed income—typically in search of higher return—has to balance offense and defense. 

The key is that word balance. The fact that investors need offense in addition to defense doesn't mean they should be indifferent to the mix between the two. If investors want to strive for more return, they generally have to take on more uncertainty—more risk. If investors aspire to higher returns than can be achieved in bonds, they can’t expect to get there through loss avoidance alone. Some offense is needed, and with offense comes increased uncertainty. A decision to go that way should be made consciously and intelligently.