Credit-default swaps remedied the problem of open-ended risk for me. If I bought a credit-default swap, my downside was defined and certain, and the upside was many multiples of it.

It is a tenet of my investment style that, on the subject of common stock investment, maximizing the upside means first and foremost minimizing the downside. The deleterious effect of permanent capital loss on portfolio returns cannot be overstated.

Just as things get overdone on the upside, they can get overdone on the downside.

Subprime mortgages, typically defined as those issued to borrowers with low credit scores, make up roughly the riskiest one-third of all mortgages.

The upside possibilities are enormous. The downside is minimal.

Throughout the universe of public and private funds, managers are measured quarterly against one index or another, defined by statistics, and corralled into this category or that category so that fund of funds, pensions, and other institutions can make comforting - if not necessarily prudent - asset allocation decisions.