More on this book
Community
Kindle Notes & Highlights
by
Howard Marks
“Experience is what you got when you didn’t get what you wanted.”
Everything should be made as simple as possible, but not simpler.
achieve the superior insight, intuition, sense of value and awareness of psychology that are required for consistently above-average results.
Since other investors may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess.
What is the range of likely future outcomes? • Which outcome do I think will occur? • What’s the probability I’m right? • What does the consensus think? • How does my expectation differ from the consensus? • How does the current price for the asset comport with the consensus view of the future, and with mine? • Is the consensus psychology that’s incorporated in the price too bullish or bearish? • What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?
Some are academics who teach investing. Others are well-intentioned practitioners who overestimate the extent to which they’re in control; I think most of them fail to tote up their records, or they overlook their bad years or attribute losses to bad luck.
you have to hold nonconsensus views regarding value, and they have to be accurate. That’s not easy.
in the sense of “speedy, quick to incorporate information,” not “right.”
That’s what makes the mainstream markets awfully hard to beat—even if they aren’t always right.
I have my own reservations about the theory, and the biggest one has to do with the way it links return and risk.
higher return is explained by hidden risk.” (The fallback position is to say, “You don’t have enough years of data.”)
the asset class is widely known and has a broad following; • the class is socially acceptable, not controversial or taboo; • the merits of the class are clear and comprehensible, at least on the surface ; and • information about the class and its components is distributed widely and evenly.
market characterized by mistakes and mispricings can be beaten by people with rare insight.
inefficient market is one that is marked by at least one (and probably, as a result, by all) of the following characteristics:
Market prices are often wrong. Because access to information and the analysis thereof are highly imperfect, market prices are often far above or far below intrinsic values.
The risk-adjusted return on one asset class can be far out of line with those...
This highlight has been truncated due to consecutive passage length restrictions.
Because of the existence of (a) significant misvaluations and (b) differences among participants in terms of skill, insight and information access, it is possible for misvaluations to be identified and profited from with regularity.
Inefficient markets do not necessarily give their participants generous returns. Rather, it’s my view that they provide the raw material—mispricings—that can allow some people to win and others to lose on the basis of differential skill.
“in every game there’s a fish. If you’ve played for 45 minutes and haven’t figured out who the fish is, then it’s you.”
believe strongly that mainstream securities markets can be so efficient that it’s largely a waste of time to work at finding winners there.
those based on analysis of the company’s attributes, known as “fundamentals,” and those based on study of the price behavior of the securities themselves.
Those estimates must be derived rigorously, based on all of the available information.
financial resources, management, factories, retail outlets, patents, human resources, brand names and growth potential—
both require us to deal with the future.
However, I think it can fairly be said that growth investing is about the future, whereas value investing emphasizes current-day considerations but can’t escape dealing with the future.
For one thing, it depends on an accurate estimate of value. Without that, any hope for consistent success as an investor is just that: hope.
The most we value investors can hope for is to be right about an asset’s value and buy when it’s available for less. But doing so today certainly doesn’t mean you’re going to start making money tomorrow.
“Being too far ahead of your time is indistinguishable from being wrong.”
absolutely true
Makes sense; that’s why stores do more business when goods go on sale. It
The danger is maximized when they start to think, “It’s down so much, I’d better get out before it goes to zero.” That’s the kind of thinking that makes bottoms . . . and causes people to sell there.
An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse. This one statement shows how hard it is to get it all right.
An accurate estimate of intrinsic value is the essential foundation for steady, unemotional and potentially profitable investing.
Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out.
Oh yes, there’s a third: you have to be right.
its short-term fluctuations determined primarily—by two other factors: psychology and technicals.
mutual funds that require portfolio managers to buy.
You can’t make a career out of buying from forced sellers and selling to forced buyers; they’re not around all the time, just on rare occasions at the extremes of crises and bubbles.
Since buying from a forced seller is the best thing in our world, being a forced seller is the worst.
The combination of arrogance, failure to understand and allow for risk, and a small adverse development can be enough to wreak havoc. It can happen to anyone who doesn’t spend the time and effort required to understand the processes underlying his or her portfolio. Mostly it comes down to psychology that’s too positive and thus prices that are too high.
They believe high return and low risk can be achieved simultaneously by buying things for less than they’re worth.
and it truly is the best we have. While
the prices of fundamentally riskier securities fluctuate more than those of safer ones, and thus that the Sharpe ratio has some relevance.
Did the investor do a good job of assessing the risk entailed? That’s another good question that’s hard to answer.
It’s impossible to assess the accuracy of probability estimates other than 0 and 100 except over a very large number of trials.
“Risk means more things can happen than will happen.”
“There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.”
But to cope with the future it’s not sufficient to have a central expectation; we have to have a sense for the other possible outcomes and their
However, people often use the terms bell-shaped and normal interchangeably, and they’re not the same. The
Failure to distinguish between the two doubtless made an important contribution to the recent credit crisis.
In many cases they made the assumption that future events would be normally distributed.
