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Kindle Notes & Highlights
by
Howard Marks
Read between
November 13 - November 22, 2018
Only with the confidence created by a strong decision-making process can investors sell speculative excess and buy despair-driven value.
Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.
If everyone likes it, it’s probably because it has been doing well. Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out.
(Sure, it’s possible for something to move from “overvalued” to “more overvalued,” but I wouldn’t want to count on it happening.)
Superior investors know—and buy—when the price of something is lower than it should be.
Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.
time. The key—as usual—was to become skeptical of what “everyone” was saying and doing.
The error is clear. The herd applies optimism at the top and pessimism at the bottom. Thus, to benefit, we must be skeptical of the optimism that thrives at the top, and skeptical of the pessimism that prevails at the bottom.
“investment is the discipline of relative selection.” That expression has stayed with me for thirty-five years. 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.
First-level thinkers tend to view past price weakness as worrisome, not as a sign that the asset has gotten cheaper.)
It’s obvious that investors can be forced into mistakes by psychological weakness, analytical error or refusal to tread on uncertain ground. Those mistakes create bargains for second-level thinkers capable of seeing the errors of others.
You simply cannot create investment opportunities when they’re not there. The dumbest thing you can do is to insist on perpetuating high returns—and give back your profits in the process. If it’s not there, hoping won’t make it
Invest as if it’s not true. The trouble with this is that “wishing won’t make it so.” Simply put, it doesn’t make sense to expect traditional returns when elevated asset prices suggest they’re not available.
You want to take risk when others are fleeing from it, not when they’re competing with you to do so.
Usually, would-be sellers balance the desire to get a good price with the desire to get the trade done soon.
One way to get to be right sometimes is to always be bullish or always be bearish; if you hold a fixed view long enough, you may be right sooner or later.
the future turns out to be like the past, it’s unlikely big money will be made, even by those who foresaw correctly that it would.
Its adherents generally believe you can’t know the future; you don’t have to know the future; and the proper goal is to do the best possible job of investing in the absence of that knowledge.
On the other hand, those who feel they don’t know what the future holds will act quite differently: diversifying, hedging, levering less (or not at all), emphasizing value today over growth tomorrow, staying high in the capital structure, and generally girding for a variety of possible outcomes.
Why not simply try to figure out where we stand in terms of each cycle and what that implies for our actions?
But I’m confident that every trend will stop sooner or later. Nothing goes on forever.
even if we can’t predict the timing and extent of cyclical fluctuations, it’s essential that we strive to ascertain where we stand in cyclical terms and act accordingly.
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
Simply put, we must strive to understand the implications of what’s going on around us.
Contrarian investors who had cut their risk and otherwise prepared during the lead-up to the crisis lost less in the 2008 meltdown and were best positioned to take advantage of the vast bargains it created.
My response is simple: try to figure out what’s going on around us, and use that to guide our actions.
The investment world is not an orderly and logical place where the future can be predicted and specific actions always produce specific results.
The correctness of a decision can’t be judged from the outcome. Nevertheless, that’s how people assess it. A good decision is one that’s optimal at the time it’s made, when the future is by definition unknown.
the things that happened are only a small subset of the things that could have happened.
the fact that a stratagem or action worked—under the circumstances that unfolded—doesn’t necessarily prove the decision behind it was wise.
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.
Investors of the “I don’t know” school understand that their skill should be judged over a large number of rolls, not just one (and that rolls can be few and far between).
It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.
Several things go together for those who view the world as an uncertain place: healthy respect for risk; awareness that we don’t know what the future holds; an understanding that the best we can do is view the future as a probability distribution and invest accordingly; insistence on defensive investing; and emphasis on avoiding pitfalls. To me that’s what thoughtful investing is all about.
Asking for investment advice without specifying that is like asking a doctor for a good medicine without telling him or her what ails you.
The choice between offense and defense investing should be based on how much the investor believes is within his or her control. In my view, investing entails a lot that isn’t.
The bottom line is that even highly skilled investors can be guilty of mis-hits, and the overaggressive shot can easily lose them the match. Thus, defense—significant emphasis on keeping things from going wrong—is an important part of every great investor’s game.
That’s my view of investing. Few people (if any) have the ability to switch tactics to match market conditions on a timely basis.
conscious balance must be struck between striving for return and limiting risk—between offense and defense.
“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, and thus risk control is more likely to create a solid foundation for a superior long-term track record. Investing
Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing does go wrong, surely the winners will take care of themselves.
The power of herd psychology to compel conformity and capitulation is nearly irresistible, making it essential that investors resist them.
And the success of your investment actions shouldn’t be highly dependent on normal outcomes prevailing; instead, you must allow for outliers.
it’s worth noting that 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.
So the general rule is that it’s important to avoid pitfalls, but there must be a limit. And the limit is different for each investor.
Too much capital availability makes money flow to the wrong places.
One way to improve investment results—which we try hard to apply at Oaktree—is to think about what “today’s mistake” might be and try to avoid
When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.
It’s not just your return that matters, but also what risk you took to get it.
