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by
Howard Marks
Read between
August 15 - August 25, 2025
“Experience is what you got when you didn’t get what you wanted.” Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk. The most valuable lessons are learned in tough times.
No rule always works.
Investing, like economics, is more art than science. And that means it can get a little messy.
one’s investment approach be intuitive and adaptive rather than be fixed and mechanistic.
In basketball they say, “You can’t coach height,” meaning all the coaching in the world won’t make a player taller.
First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”
First-level thinking is simplistic and superficial, and just about everyone can do it
Second-level thinking is deep, complex and convoluted. The second-level thinker takes a great many things into account:
First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple.
To outperform the average investor, you have to be able to outthink the consensus.
extraordinary performance comes only from correct nonconsensus forecasts, but nonconsensus forecasts are hard to make, hard to make correctly and hard to act on.
many people are misled into believing that everyone can be a successful investor.
Today, we see many YouTube Influencers Emphasizing the importance of this quote, and in this AI bubble, we are going to find out the hard way that this is true.
the prevalence of first-level thinkers increases the returns available to second-level thinkers.
do not, however, believe the consensus view is necessarily correct.
To beat the market you must hold an idiosyncratic, or nonconsensus, view.
the more efficient markets often misvalue assets,
The fact that the Warren Buffetts of this world attract as much attention as they do is an indication that consistent outperformers are exceptional.
“The higher return is explained by hidden risk.”
the asset’s price shouldn’t stray far from its intrinsic value.
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?”
Human beings are not clinical computing machines. Rather, most people are driven by greed, fear, envy and other emotions that render objectivity impossible and open the door for significant mistakes.
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.
For every person who gets a good buy in an inefficient market, someone else sells too cheap.
This shows the investor's game is zero-sum
One of the great sayings about poker is that “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.”
appreciate the opportunities that inefficiency can provide,
mainstream securities markets can be so efficient that it’s largely a waste of time to work at finding winners there.
If the return appears so generous in proportion to the risk, might you be overlooking some hidden risk?
Inefficiency is a necessary condition for superior investing.
there have to be inefficiencies in the underlying process—imperfections, mispricings—to take advantage of.
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.
theory should inform our decisions but not dominate them.
We can buy fifty correlated securities and mistakenly think we’ve diversified....
Diversification needs to have different industries in the portfolio to be real diversification
“Isn’t that a $10 bill lying on the ground?” asks the student. “No, it can’t be a $10 bill,” answers the professor. “If it were, someone would have picked it up by now.” The professor walks away, and the student picks it up and has a beer.
buy at a price below intrinsic value, and sell at a higher price. Of course, to do that, you’d better have a good idea what intrinsic value is. For me, an accurate estimate of value is the indispensable starting point.
The most complex thing to do is to understand the real value of an equity, and that's why many people buy based on price instead of value.
all approaches to investing in company securities can be divided into two basic types: 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.
an investor has two basic choices: gauge the security’s underlying intrinsic value and buy or sell when the price diverges from it, or base decisions purely on expectations regarding future price movements.
There’s even something called “net-net investing,” in which people buy when the total market value of a company’s stock is less than the amount by which the company’s current assets—such as cash, receivables and inventories—exceed its total liabilities. In this case, in theory, you could buy all the stock, liquidate the current assets, pay off the debts, and end up with the business and some cash.
Value investors buy stocks (even those whose intrinsic value may show little growth in the future) out of conviction that the current value is high relative to the current price. • Growth investors buy stocks (even those whose current value is low relative to their current price) because they believe the value will grow fast enough in the future to produce substantial appreciation.
growth investing is about the future, whereas value investing emphasizes current-day considerations but can’t escape dealing with the future.
the upside potential for being right about growth is more dramatic, and the upside potential for being right about value is more consistent.
consistency trumps drama.
It’s hard to consistently do the right thing as an investor. But it’s impossible to consistently do the right thing at the right time.
“Being too far ahead of your time is indistinguishable from being wrong.”
This makes it very difficult to hold, and to buy more at lower prices (which investors call “averaging down”), especially if the decline proves to be extensive.
No one’s comfortable with losses, and eventually any human will wonder, “Maybe it’s not me who’s right. Maybe it’s the market.” 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 estimate of intrinsic value is the essential foundation for steady, unemotional and potentially profitable investing.
Investment success doesn’t come from “buying good things,” but rather from “buying things well.”
Establishing a healthy relationship between fundamentals—value—and price is at the core of successful investing.
It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.
