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by
Howard Marks
while the distribution of financial developments—shaped by humans, with their tendency to go to emotion-driven extremes of behavior—should probably be seen as having “fatter” tails.
we have to be on the lookout for occasions when people wrongly apply simplifying assumptions to a complex world.
The performance of your portfolio under the one scenario that unfolds says nothing about how it would have fared under the many “alternative histories” that were possible.
Risk can be judged only by sophisticated, experienced second-level thinkers.
But high quality assets can be risky, and low quality assets can be safe.
When you boil it all down, it’s the investor’s job to intelligently bear risk for profit. Doing it well is what separates the best from the rest.
Likewise, an excellent investor may be one who—rather than reporting higher returns than others—achieves the same return but does so with less risk (or even achieves a slightly lower return with far less risk).
It’s an outstanding accomplishment to achieve the same return as the risk bearers and do so with less risk. But most of the time it’s a subtle, hidden accomplishment that can be appreciated only through sophisticated judgments.
Good insight
Careful risk controllers know they don’t know the future.
They know it can include some negative outcomes, but not how bad they might be, or exactly what their probabilities are. Thus, the principal pitfalls come in the inability to know “how bad is bad,” and in resulting poor decisions.
Must quantify
Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.
“You’ve got to go out on a limb sometimes because that’s where the fruit is.”
“You need comfort that the . . . risks and exposures are understood, appropriately managed, and made more transparent for everyone.... This is not risk aversion; it is risk intelligence.”
Over a full career, most investors’ results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners.
we never know what lies ahead, but we can prepare for the possibilities and reduce their sting.
Rule number one: most things will prove to be cyclical. • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.
Cycles are self-correcting, and their reversal is not necessarily dependent on exogenous events. They reverse (rather than going on forever) because trends create the reasons for their own reversal. Thus, I like to say success carries within itself the seeds of failure, and failure the seeds of success.
“the worst loans are made at the best of times.”
In the financial world, if you offer cheap money, they will borrow, buy and build—often without discipline, and with very negative consequences. “YOU
Stocks are cheapest when everything looks grim. The depressing outlook keeps them there, and only a few astute and daring bargain hunters are willing to take new positions. Maybe their buying attracts some attention, or maybe the outlook turns a little less depressing, but for one reason or another, the market starts moving up.
The swing back from the extreme is usually more rapid—and thus takes much less time—than the swing to the extreme. (Or as my partner Sheldon Stone likes to say, “The air goes out of the balloon much faster than it went in.”)
Damn true
we never know:
how far the pendulum will swing in its arc, • what might cause the swing to stop and turn back, • when this reversal will occur, or • how far it will then swing in the opposite direction.
To say this another way, many people will reach similar cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently.
The danger comes when it moves on further to greed, which Merriam-Webster’s defines as an “inordinate or all-consuming and usually reprehensible acquisitiveness especially for wealth or gain.”
The combination of greed and optimism repeatedly leads people to pursue strategies they hope will produce high returns without high risk; pay elevated prices for securities that are in vogue; and hold things after they have become highly priced in the hope there’s still some appreciation left.
