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Kindle Notes & Highlights
by
Howard Marks
Read between
August 15 - August 25, 2025
if you don’t know what the future holds, it’s foolhardy to act as if you do.
Mark Twain put it best: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Market cycles present the investor with a daunting challenge, given that: • Their ups and downs are inevitable. • They will profoundly influence our performance as investors. • They are unpredictable as to extent and, especially, timing.
the only thing we can predict about cycles is their inevitability.
As difficult as it is know the future, it’s really not that hard to understand the present. What we need to do is “take the market’s temperature.” If we are alert and perceptive, we can gauge the behavior of those around us and from that judge what we should do.
When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panic selling, we should become aggressive.
Are price/earnings ratios high or low in the context of history, and are yield spreads tight or generous?
One way to lower the price for your money is by reducing the interest rate you charge on loans. A slightly more subtle way is to agree to a higher price for the thing you’re buying,
much in investing is ruled by luck.
Every once in a while, someone makes a risky bet on an improbable or uncertain outcome and ends up looking like a genius. But we should recognize that it happened because of luck and boldness, not skill.
I always say the keys to profit are aggressiveness, timing and skill, and someone who has enough aggressiveness at the right time doesn’t need much skill.
when the future is by definition unknown. Thus, correct decisions are often unsuccessful, and vice versa.
What is a good decision? Let’s say someone decides to build a ski resort in Miami, and three months later a freak blizzard hits south Florida, dumping twelve feet of snow. In its first season, the ski area turns a hefty profit. Does that mean building it was a good decision? No.
A good decision is one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known.
Short-term gains and short-term losses are potential impostors, as neither is necessarily indicative of real investment ability (or the lack thereof ).
We should spend our time trying to find value among the knowable—industries, companies and securities—rather than base our decisions on what we expect from the less-knowable macro world of economies and broad market performance.
Given that we don’t know exactly which future will obtain, we have to get value on our side by having a strongly held, analytically derived opinion of it and buying for less when opportunities to do so present themselves.
To improve our chances of success, we have to emphasize acting contrary to the herd when it’s at extremes, being aggressive when the market is low and cautious when it’s high.
Given the highly indeterminate nature of outcomes, we must view strategies and their results—both good and bad—with suspicion until proved out over a large number of trials.
There are old investors, and there are bold investors, but there are no old bold investors.
What is offense in investing, and what is defense? Offense is easy to define. It’s the adoption of aggressive tactics and elevated risk in the pursuit of above-average gains. But what’s defense? Rather than doing the right thing, the defensive investor’s main emphasis is on not doing the wrong thing.
Concentration (the opposite of diversification) and leverage are two examples of offense. They’ll add to returns when they work but prove harmful when they don’t: again, the potential for higher highs and lower lows from aggressive tactics.
Defense, on the other hand, can increase your likelihood of being able to get through the tough times and survive long enough to enjoy the eventual payoff from smart investments.
The amount of risk you’ll bear is a function of the extent to which you choose to pursue return.
“Because ensuring the ability to survive under adverse circumstances is incompatible with maximizing returns in the good times, investors must choose between the two.”
The aggressive lender will look smarter than the prudent lender (and make more money) as long as the environment remains salutary.
Low price is the ultimate source of margin for error.
So the choice is simple: try to maximize returns through aggressive tactics, or build in protection through margin for error. You can’t have both in full measure. Will it be offense, defense or a mix of the two
“if we avoid the losers, the winners will take care of themselves.”
the avoidance of losses and terrible years is more easily achieved than repeated greatness,
defense can provide good returns achieved consistently, while offense may consist of dreams that often go unmet. For me, defense is the way to go.
Worry about the possibility of loss. Worry that there’s something you don’t know. Worry that you can make high-quality decisions but still be hit by bad luck or surprise events. Investing scared
An investor needs do very few things right as long as he avoids big mistakes. WARREN
trying to avoid losses is more important than striving for great investment successes.
Most of the time the future is indeed like the past, so extrapolation doesn’t do any harm. But at the important turning points, when the future stops being like the past, extrapolation fails and large amounts
the big difference between probability and outcome. Things that aren’t supposed to happen do happen. Short-run outcomes can diverge from the long-run probabilities, and occurrences can cluster.
Most of the meltdowns in the recent credit crisis took place because something didn’t go as it was supposed to.
the assumption that something can’t happen has the potential to make it happen, since people who believe it can’t happen will engage in risky behavior and thus alter the environment.
failure of imagination consists in the first instance of not anticipating the possible extremeness of future events,
psychological forces are some of the most interesting sources of investment error. They can greatly influence security prices.
When greed goes to excess, security prices tend to be too high. That makes prospective return low and risk high.
The second of the errors is something we might call the error of not noticing. You may not be motivated by greed; for example, your 401(k) plan may invest in the stock market steadily and passively through an index fund.
third form of error doesn’t consist of doing the wrong thing, but rather of failing to do the right thing.
bullish markets, inadequate skepticism makes this a frequent occurrence, as investors accept that • some new development will change the world, • patterns that have been the rule in the past (like the ups and downs of the business cycle) will no longer occur, • the rules have been changed (such as the standards that determine whether companies are creditworthy and their debt worth holding), or • traditional valuation norms are no longer relevant (including price/ earnings ratios for stocks, yield spreads for bonds or capitalization rates for real estate).
The combination of greed and optimism repeatedly leads people to pursue strategies they hope will produce high returns without high risk;
Too much capital availability makes money flow to the wrong places.
When capital goes where it shouldn’t, bad things happen.
When capital is in oversupply, investors compete for deals by accepting low returns and a slender margin for error.
Widespread disregard for risk creates great risk.
Inadequate due diligence leads to investment losses.
