Optimistic Pessimistic
Sanguine Distressed
Eager to buy Uninterested in buying
Asset owners: Happy to hold Rushing for the exits
Sellers: Few Many
Markets: Crowded Starved for attention
Funds: Hard to gain entry Open to anyone
New ones daily Only the best can raise money
GPs rule LPs have bargaining power
Recent performance: Strong Weak
Asset prices: High Low
Prospective returns: Low High
Risk High Low
Popular qualities: Aggressiveness Caution and discipline
Broad reach Selectivity
“I find that I agree with essentially all of Taleb’s important points.
- Investors are right (and wrong) all the time for the ‘wrong reason.’ Someone buys a stock because he or she expects a certain development; it doesn’t occur; the market takes the stock up anyway; the investor looks good (and invariably accepts credit).
- 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 makde, when the future is by definition uknown. Thus, correct decisions are often uncessucessful, and vice versa.
- Randomness alone can produce just about any outcome in the short run. In portfolios that are allowed to reflect them fully, market movements can easily swamp the skillfulness of the manger (or lack thereof). But certainly market movements cannot be credited to the manager (unless he or she is the rare market time who’s capable of getting it right repeatedly).
- For these reasons, investors often receive credit they don’t deserve. One good coup can be enough to build a reputation, but clearly a coup can arise out of randomness alone. Few of these ‘geniuses’ are right more than once or twice in a row.
- Thus, it’s essential to have a large number of observations – lots of years of data – before judging a given manager’s ability.”
— Howard Marks[150]
“Defensive investing sounds erudite, but I can simplify it: Invest scared!” – Howard Marks[151]
“Most of these eleven lessons [from a crisis] can be reduced to just one: be alert to what’s going on around you with regard to the supply/demand balance for investable funds and the eagerness to spend them.” – Howard Marks[152]
“The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.” – Howard Marks[153]
“The formula for error is simple, but the ways it appears are infinite – far too many to allow enumeration. Here are the usual ingredients:
- data or calculation error in the analytical process leads to incorrect appraisal of value;
- the full range of possibilities or their consequences is underestimated;
- greed, fear, envy, ego, suspension of disbelief, conformity or capitulation, or some combination of these, moves to an extreme;
- as a result, either risk taking or risk avoidance becomes excessive;
- prices diverge significantly from value; and
- investors fail to notice this divergence, and perhaps continue its furtherance.”
— Howard Marks[154]
“..think about what ‘today’s mistake’ might be and try to avoid it.” – Howard Marks[155]
“The best foundation for a successful investment – or a successful investment career – is value. You must have a good idea of what the thing you’re considering buying is worth. There are many components to this and many ways to look at it. To oversimplify, there’s cash on the books and the value of the tangible assets; the ability of the company or asset to generate cash; and the potential for these things to increase.” – Howard Marks[156]
“…girding for bad times, and thereby ensuring margin for error, is more essential than preparing for good times.” – Howard Marks[157]
“We believe that because there’s so much we can’t know about the future, we should invest only where our analysis tells us the worst case is tolerable.” – Howard Marks, memo to clients, dated March 11, 2003
“I have no interest in being a pessimist or a bear, and I don’t like to think of myself that way. I just may be more impressed by the unknowability of the future than most people. When I reflect on all of the mottoes I use, it seems half of them relate to how little we can know about what lies ahead.” – Howard Marks (2001)
On the demand for “high-return, low-risk” investment vehicles led to artificial demand for housing à mortgages à RMBS à CDOs: “When the perpetual motion machine of house appreciation ground to a halt in 2007, the combination of too-high prices and record mortgage defaults resulted in the first nationwide decline in housing prices. Thus, in the end, the belief that an asset was safe led to investor behavior that made it unsafe. That’s reflexivity.” – Howard Marks[158]
“Inefficient markets do not necessarily give their participants generous returns. Rather, it’s my view that they provide the raw material – mispricings – that can allow some people to win and others to lose on the basis of differential skill.”- Howard S. Marks
“History constantly reminds us that in an uncertain world there is no visibility of prospects. Future earnings cannot be predicted with accuracy.” – David Dreman, Contrarian Investment Strategies: The Next Generation
“During inflation, Goodwill is the gift that keeps on giving.” – Warren Buffett[159]
“Nothing’s more risky than a widespread belief that there’s no risk.” – Howard Marks[160]
“It’s not possible that something can be a good investment regardless of the price paid. But when a logical-seeming platitude is adopted by the stampeding herd, that belief is the result. That’s how we get bubbles.” – Howard Marks[161]
“It’s not sufficient to think about surviving ‘on average’ – investment survival has to be achieved every day, under all circumstances.” – Howard Marks[162]
“Ensuring sufficient margin for error and attempting to maximize returns are incompatible.” – Howard Marks[163]
“Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.” – Howard Marks[164]
“[The massive rally in 2009] shows that good [absolute] fundamentals aren’t a prerequisite for gains. Too-cheap prices, a halt to fundamental deterioration and forced selling, improved psychology and the arrival of buyers can be enough.” – Howard
