Mastering The Market Cycle: Getting the odds on your side

by Howard Marks

In investing there’s a complex relationship between humility and confidence. Since the greatest bargains are usually found among things that are undiscovered or disrespected, to be successful an investor has to have enough confidence in his judgment to adopt what David Swensen, the hugely successful head of Yale’s high-performing endowment, describes as “uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom” (Pioneering Portfolio Management, 2000). By definition, pronounced bargain prices are most likely to be found among things that conventional wisdom dismisses, that make most investors uncomfortable, and whose merits are hard to comprehend. Investing in them requires considerable inner strength. When one of those positions initially fails to rise as the investor expects — or perhaps goes in the opposite direction — the investor has to have enough confidence to hold on to his position or even add to it. He can’t take a price decline as a sure “sell” signal; in other words, it can’t be his default position that the market knows more than he does. But, on the other hand, the investor also has to know his limitations and not assume he’s infallible. He has to understand that no one knows for sure what the macro future holds. While he’s likely to have opinions regarding the future course of economies, markets and interest rates, he should acknowledge that they’re not necessarily correct. And, counter to the abov...