- you be overlooking some hidden risk?
- Why would the seller of the asset be willing to part with it at a price from which it will give you an excessive return?
- Do you really know more about the asset than the seller does?
- If it’s such a great proposition, why hasn’t someone else snapped it up?”
— Howard Marks[138]
“The discipline that is most important is not accounting or economics, but psychology. The key is who likes the investment now and who doesn’t. Future price changes will be determined by whether it comes to be liked by more people or fewer people in the future. 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 safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price, can go only one way: up.” – Howard Marks[139]
“Riskier investments are those for which the outcome is less certain. That is, the probability distribution is wider. When priced fairly, riskier investments should entail:
- higher expected returns,
- the possibility of lower returns, and
- in some cases the possibility of losses.” – Howard Marks[140]
“Whatever few awards are presented for risk control, they’re never given out in good times. The reason is that risk is covert, invisible. Risk – the possibility of loss – is not observable. What is observable is loss, and loss generally happens only when risk collides with negative events…Loss is what happens when risk meets adversity. Risk is the potential for loss if things go wrong. As long as things go well, loss does not arise. Risk gives rise to loss only when negative events occur in the environment…The important thing here is the realization that risk may have been present even though loss didn’t occur.” – Howard Marks[141]
“Rule number one is that most things will prove to be cyclical. Rule number two is that some of the greatest opportunities for gain and loss come when other people forget rule number one.” – Howard Marks[142]
“The pendulum swing regarding attitudes toward risk is one of the most powerful of all. In fact, I’ve boiled down the main risks in investing to two: the risk of losing money and the risk of missing opportunity. It’s possible to eliminate either one, but not both.” – Howard Marks[143]
“…the three stages of a bull market.
- The first, when a few forward-looking people begin to believe things will get better
- The second, when most investors realize improvement is actually taking place
- The third, when everyone concludes things will get better forever.
“…the three stages of a bear market:
- The first, when just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy
- The second, when most investors recognize things are deteriorating
- The third, when everyone’s convince things can only get worse”
— Howard Marks[144]
Weapons against irrational, emotional investing:
- a strongly held sense of intrinsic value,
- insistence on acting as you should when price diverges from value,
- enough conversance with past cycles – gained at first from reading and talking to veteran investors, and later though experience – to know that market excesses are ultimately punished, not rewarded,
- a thorough understanding of the insidious effect of psychology on the investing process at market extremes,
- a promise to remember that when things seem ‘too good to be true,’ they usually are,
- willingness to look wrong while the market goes from misvalued to more misvalued (as it invariably will), and
- like-minded friends and colleagues from whom to gain support (and for you to support).”
— Howard Marks[145]
“…because of the variability of the many factors that influence markets, no tool – not even contrarianism – can be relied on completely.
- Contrarianism isn’t an approach that will make you money all of the time. Much of the time there aren’t great market excesses to bet against.
- Even when an excess does develop, it’s important to remember that ‘overpriced’ is incredibly different from ‘going down tomorrow.’
- Markets can be over- or underpriced and stay that way – or become more so – for years.
- It can be extremely painful when the trend is going against you.
- It can appear at times that ‘everyone’ has reached the conclusion that the herd is wrong. What I mean is that contrarianism itself can appear to have become too popular, and thus contrarianism can be mistaken for herd behavior.
- Finally, it’s not enough to bet against the crowd. Given the difficulties associated with contrarianism just mentioned, the potentially profitably recognition of divergences from consensus thinking must be based on reason and analysis. You must do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong. Only then will you be able to hold firmly to your views and perhaps buy more as your positions take on the appearance of mistakes and as losses accrue rather than gains.”
— Howard Marks[146]
“The key during crisis is to be (a) insulated from the forces that require selling and (b) positioned to be a buyer instead. To satisfy those criteria, an investor needs the following things: staunch reliance on value, little or no use of leverage, long-term capital and a strong stomach. Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns.” – Howard Mark[147]
“I’m firmly convinced that (a) it’s hard to know what the macro future holds and (b) few people possess superior knowledge of these mattes that can regularly be turned into an investing advantage. There are two caveats, however:
- The more we concentrate on smaller-picture things, the more it’s possible to gain a knowledge advantage. With hard work and skill, we can consistently know more than the next person about individual companies and securities, but that’s much less likely with regard to markets and economies. Thus I suggest people try to ‘know the knowable.’
- An exception comes int eh form of my suggestion…that investors should make an effort to figure out where they stand at a moment in time in terms of cycles and pendulums. That won’t render the future twists and turns knowable, but it can help one prepare for likely developments.”
— Howard Marks[148]
“THE POOR MAN’S GUIDE TO MARKET ASSESSMENT”[149]
“If you find that most of your checkmarks are in the left-hand column…hold on to your wallet.”
Economy: Vibrant Sluggish
Outlook: Positive Negative
Lenders: Eager Reticent
Capital markets: Loose Tight
Capital: Plentiful Scarce
Terms: Easy Restrictive
Interest rates: Low High
Spreads: Narrow Wide
Investors:
