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by
Howard Marks
“Experience is what you got when you didn’t get what you wanted.”
Remember, your goal in investing isn’t to earn average returns; you want to do better than average.
All investors can’t beat the market since, collectively, they are the market.
The problem is that extraordinary performance comes only from correct nonconsensus forecasts, but nonconsensus forecasts are hard to make, hard to make correctly and hard to act on.
Second-level thinkers know that, to achieve superior results, they have to have an edge in either information or analysis, or both. They are on the alert for instances of misperception. My son Andrew is a budding investor, and he comes up with lots of appealing investment ideas based on today’s facts and the outlook for tomorrow. But he’s been well trained. His first test is always the same: “And who doesn’t know that?”
The key turning point in my investment management career came when I concluded that because the notion of market efficiency has relevance, I should limit my efforts to relatively inefficient markets where hard work and skill would pay off best.
“Being too far ahead of your time is indistinguishable from being wrong.”
Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out. Thus, there are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third: you have to be right.
Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.
“The market can remain irrational longer than you can remain solvent.”
“the relation between different kinds of investments and the risk of loss is entirely too indefinite, and too variable with changing conditions, to permit of sound mathematical formulation.”
“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.” That’s one of the most important things you can know about investment risk.
My belief is that because the system is now more stable, we’ll make it less stable through more leverage, more risk taking. MYRON SCHOLES
The truth is, risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so . . . and risk compensation will disappear.
They took on too much leverage and committed too much capital to illiquid investments.
Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion.
People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it; thus, they accept risk unknowingly and in so doing contribute to its creation.
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.
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 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.”
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.
The market has a mind of its own, and it’s changes in valuation parameters, caused primarily by changes in investor psychology (not changes in fundamentals),
“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.”
As Warren Buffett told Congress on June 2, 2010, “Rising prices are a narcotic that affects the reasoning power up and down the line.”
To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit. SIR JOHN TEMPLETON
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
Yogi Berra is famous for having said, “Nobody goes to that restaurant anymore; it’s too crowded.”
For forty years I’ve seen the manic-depressive pendulum of investor psychology swing crazily: between fear and greed—we all know the refrain—but also between optimism and pessimism, and between credulity and skepticism.
skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.
The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left.
The best opportunities are usually found among things most others won’t do.
“investment is the discipline of relative selection.”
Sid’s simple phrase embodies two important messages. First, the process of investing has to be rigorous and disciplined. Second, it is by necessity comparative.
As a result, a bargain asset tends to be one that’s highly unpopular. Capital stays away from it or flees, and no one can think of a reason to own it.
We’re active investors because we believe we can beat the market by identifying superior opportunities. On the other hand, many of the “special deals” we’re offered are too good to be true, and avoiding them is essential for investment success.
You tend to get better buys if you select from the list of things sellers are motivated to sell rather than start with a fixed notion as to what you want to own. An opportunist buys things because they’re offered at bargain prices. There’s nothing special about buying when prices aren’t low.
We have two classes of forecasters: Those who don’t know—and those who don’t know they don’t know. JOHN KENNETH GALBRAITH
There are two kinds of people who lose money: those who know nothing and those who know everything. HENRY KAUFMAN
The seven scariest words in the world for the thoughtful investor—too much money chasing too few deals—provided an unusually apt description of market conditions.
Taleb in his book Fooled by Randomness. Some of the concepts I explore here occurred to me before I read it, but Taleb’s book put it all together for me and added more. I consider it one of the most important books an investor can read.
There are old investors, and there are bold investors, but there are no old bold investors.
An investor needs do very few things right as long as he avoids big mistakes. WARREN BUFFETT
