Howard Marks Shares One Of The Most Important Rules To Investing by Lars Christian Haugen
One Of The World’s Best Investors
“I think it’s essential to remember that just about everything is cyclical. There’s little I’m certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero. And there's little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future.”SALT New York: Canyon, Mudrick, Fortress And Sculptor On Finding Distressed Value
At the 2021 SALT New York conference, which was held earlier this week, one of the panels on the main stage discussed the best macro shifts coming out of the pandemic and investing in value amid distress. The panel featured: Todd Lemkin, the chief investment officer of Canyon Partners; Peter Wallach, the managing director and Read More
Howard Marks - from his book "The Most Important Thing"
As an investor you are probably always looking for simple tips and rules that can increase your investing success. I do too. At the end of the day we are all aiming to become better investors and make more money (we are certainly not trying to become worse investors).
That’s why I like to remind myself of simple concepts because it puts everything into perspective. It lets you ignore all the noise and focus on the most important points.
I therefore want to discuss a very important concept that can both save you, and make you, a lot of money:
I was reminded about the importance of cycles when I read Howard Marks’ book “The Most Important Thing”.
If you don’t know who Howard Marks is here’s a short bio that explains why you should listen to him: he co-founded the world’s largest distressed debt investment firm (Oaktree), has a net worth of $1.91 billion (according to Forbes) and according to Warren Buffett: "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book."
I wanted to write this article because last year I was considering investing in a company that was going through some difficult times. They had made some bad moves, and there was no doubt the company was in trouble. But I believed that the market was being too negative. Yes, the company definitely had problems, but I believed they were temporary and I did not think the company would go bankrupt.
At the time I was in the south of France (I know, it’s a tough life) and I suddenly remembered a very important paragraph from “the most important thing”, which was the quote at the beginning of this article. I thought to myself:
“This concept is so important and simple, and if I can take advantage of cycles I can make a lot of money”.
But the harsh reality is that cycles lead the majority of investors to lose money. Why?
So Simple, Yet So Difficult
Cycles is a concept that we all know about. It’s not like you are reading this and thinking to yourself “I’ve never heard of these cycles that he’s talking about”.
But still, we ignore this concept. I’m saying this because I’m very guilty of it myself. At the top of a cycle we think things will go on forever (e.g. top of the housing boom in 2007), but then at the bottom of the cycle our mindset completely changes (did you also feel the world was going to end in 2008?).
So why do cycles keep happening if we all know about them?
Howard Marks argues that markets are cyclical because they are driven by people, and people are emotional. External factors do affect the markets, but it’s people’s over/under reaction to these events that create cycles.
And I think the reason why we ignore cycles is because they don’t matter until they really matter. And that usually happens only once every few years, so it’s easy to forget. And if you think you can ignore cycles, consider this quote from Marks:
“Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do”.
And then let’s look at two rules that he lays out, just to really hammer in the point about how important cycles are:
Rule 1: most things will prove to be cyclical
Rule 2: some of the greatest opportunities for gain and loss come when other people forget rule number 1.
And therein lies the good news. If you are aware of cycles and can take advantage of them you can make a lot of money, and also save yourself a lot of money. As Howard Marks says: “cycles are self correcting” so in theory you just have to wait for the turn-around. However, this is MUCH easier said than done. If it were simple, everyone would be exploiting cycles, and then eventually cycles would not exist anymore. But that’s not the case. Cycles will always exist and they are a potential threat to your investing.
To be honest, I’m not completely sure because it deals with people’s emotions and psychology, and in those areas we are all different. But I’ll try giving you a few tips anyway.
I think being very aware of the concept gives you an advantage. Just writing this article forces me to really consider the impact of cycles. And it will be difficult for me to ignore them in the future because I have now written an article about it.
But the best solution is probably to find a market you believe has bottomed and make an investment. When you do this you will actually feel how gut-wrenching it is. All the negative self talk will start happening (“what if I’m wrong”, “I risk looking like an idiot”, “I can lose a lot of money”). It’s a completely different thing making an actual investment, than just reading about it, trust me.
I could go on and on trying to convince you how important cycles are, but I believe you already know. This article is just a gentle reminder.
And If I can leave you with anything, it’s this:
“Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do” - Howard Marks
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PS: the share price of the company I am talking about in this article is currently about flat compared to when I bought it, so I might very well turn out to be wrong.