Widely read:
Howard Marks is one of our favourite investors at Value Research. His memos are a treasure trove for anyone interested in investing. In his recent memo, 'I Beg to Differ', Howard lays out some of the most important qualitative traits for successful investing. Here are some excerpts from that memo.
The route to superior returns by necessity runs through unconventionality
"The consensus opinion of market participants is baked into market prices. Thus, if investors lack the insight that is superior to the average of the people who make up the consensus, they should expect average risk-adjusted performance."
"If you want to be above average, you have to depart from consensus behavior. You have to overweight some securities, asset classes, or markets and underweight others. In other words, you have to do something different."
"The challenge lies in the fact that (a) market prices are the result of everyone's collective thinking and (b) it's hard for any individual to consistently figure out when the consensus is wrong and an asset is priced too high or too low."
Importance of being a second-level thinker
"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in 'The outlook for the company is favorable, meaning the stock will go up.'"
"Second-level thinking is deep, complex, and convoluted. The second-level thinker takes a great many things into account:
- What is the range of likely future outcomes?
- What outcome do I think will occur?
- What's the probability I'm right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future, and with mine?
- Is the consensus psychology that's incorporated in the price too bullish or bearish?
- What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?"
"Anyone who thinks there's a formula for investing that guarantees success (and that they can possess it) clearly doesn't understand the complex, dynamic, and competitive nature of the investing process."
Contrarianism
"It amounts to much more than simply doing the opposite of the crowd. Nevertheless, good investment decisions made at the best opportunities - at the most overdone market extremes - invariably include an element of contrarian thinking."
What it takes to deliver superior returns?
"Unconventional behavior is the only road to superior investment results, but it isn't for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes. Thus each person has to assess whether he's temperamentally equipped to do these things and whether his circumstances - in terms of employers, clients and the impact of other people's opinions - will allow it...when the chips are down and the early going makes him look wrong, as it invariably will."
"You can't have it both ways. And as in so many aspects of investing, there's no right or wrong, only right or wrong for you."
Eschewing short-term investing in favour of long-term investing
"I believe most investors have their eye on the wrong ball. One quarter's or one year's performance is meaningless at best and a harmful distraction at worst. But most investment committees still spend the first hour of every meeting discussing returns in the most recent quarter and the year to date. If everyone else is focusing on something that doesn't matter and ignoring the thing that does, investors can profitably diverge from the pack by blocking out short-term concerns and maintaining a laser focus on long-term capital deployment."
Suggested read: Investing wisdom from Howard Marks
This article was originally published on July 28, 2022.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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