Howard Marks

Howard Marks

This a collection of almost everything including stories, lessons, short quotes which I will keep updating often.

Feel free to jump anywhere,

Marksism

Oaktree’s Investment Philosophy:

  • The primacy of risk control
  • Emphasis on consistency
  • The importance of market inefficiency
  • The benefits of specialization
  • Macro forecasting not critical to investing
  • Disavowal to market timings

My first premise in investing is we never know what is going to happen, we don’t know what events will unfold, we don’t know how markets will react to those.

The future in all regards is probability distribution. The best investors don’t know what is going to happened but they understand the possible events and can assign reasonable probabilities.

Two simple rules to follow:

  • Rule No. 1: Most things will prove to be cyclical.
  • Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.

Cycles are most important thing in the world and if you are going to live in the world I think most important thing is to recognize the cycles as they occur and where we stand in them and what that implies with the future. Cycles are not regular.

Investing is intellectually challenging, it’s always different. There is no process in my opinion that always works and which means you have to be adaptive and flexible and have to see things as they are. It’s extremely stimulating and if you try it and you like it, if it’s right for you.

Psychological mistakes are at the same time the biggest source of danger for an investor and the biggest source of opportunity when other people succumb to those mistakes. If you can keep your head about you when everyone else is losing theirs, you can profit in ways which beat the market.

How do you make money as an investor? People who don’t know think the way you do it by buying good assets, a good building, stock in good company or something like that. That is not the secret of success. The secret for success is buying things for less than they are worth.

Why can’t people beat the market? Because the market’s pretty efficient. And the market prices most things right. And most people can’t find and identify and act on the times when market prices things wrong. That’s why people can’t beat the market.

It is our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling – and if our view turns out to be right – that’s the route to the greatest rewards earned with the least risk.

The goal is to buy low and sell high. I think that an understanding of cycles allows you to understand when we’re high and when we’re low, and the key in understanding that is to understand why we’re high and why we’re low.

We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future. If great investors like Marks, Buffett, Munger, Lynch etc. can’t make macro forecasts, do you think economists can? If you do believe they can, “Where are the economists’ yachts?”

The first lesson I learnt at Wharton from reading the book Decisions Under Uncertainty: Drilling Decisions by Oil and Gas Operators by C. Jackson Grayson, Jr. was “you can’t tell the quality of decisions from its outcome.” As Grayson explained, you make the best decision you can based on what you know, but the success of your decision will be heavily influenced by (a) relevant informationyou may lack and (b) luck or randomness. Because of these two factors, well-thought-out decisions may fail, and poor decisions may succeed. While it might seem counterintuitive, the best decision-maker isn’t necessarily the person with the most successes, but rather the one withthe best process and judgment. The two can be far from the same,and especially over a small number of trials, it can be impossible to know who’s who.

Dave Swenson says in his book that superior investing requires the adoption of uncomfortably idiosyncratic positions. And those two words are fabulous because if you want to be superior investor even if you want to avoid horrible mistakes by definition you must invest differently from the herd. You must invest idiosyncratically. But by definition these idiosyncratic positions are uncomfortable, why? Because markets goes upwards, every stock is getting more valuable everyday, you say it’s overpriced, you get out, it continues higher. Everybody is making money telling you what an idiot you are to get out. There’s a book about bubbles and crashes by Charles Kindleberger, he says there is nothing worse your equilibrium to watch a friend get rich. Nobody ever identified an overpriced assest and got out only to see if go down the other day. General rule, overpriced assets become more overpriced and you have to be able to live with that comfortably.

I really think the most important single decision for what I call the medium term in investing is whether to be more aggressive or more defensive at a point in time. If you have a aggressive portfolio in a period when defense was called for you will get chewed up and if you have a aggressive portfolio in a period when agressiveness was propitious, you’ll be successful.

In investing there is something called contrarian behaviour. All the great investors are by definition contrarian. In order to have great investment result, you have to buy when everyone is selling and prices are low and, you have to get out when everybody’s buying and prices are up. You have to avoid the things everybody loves, you have to buy things everybody hates.

I believe that every investor myself included everyday faces two risks, they call them two risks. First one is obvious the risk of losing money, second one is little more subtle, it’s the risk of missing opportunities and we have to confront these everyday. You can eliminate one but it puts you firmly in the crosshairs of the others or you can compromise on the two. Most people say, “I don’t want to lose money and on other hand I don’t want to miss all the opportunities”. All one or all other makes absolutely no sense.

The next question is how to balance these risks. The way I think is there’s a speedometer like the one on dashboard of your car and it goes from 0 to 100. 0 is all cash and 100 is fully invested in risky securities and perhaps using margin or leverage and question is where should you be in between. If you want to invest and when most people say I want to make money so I’m going to invest and they try to think about they want to buy Apple or Amazon but they miss the step. The first step that everybody who considers investing should take is to say from 0 to 100 who am I?

Given my age, my financial position, my pysche, my income, my requirements, my dependents, where should I normally be? If you are young and have a great career ahead, if you are making more money than you need and don’t have any dependents and even if you make mistake in investing you have decades more to make right. Another case is, if you are 80 or 90, if you are approaching retirement, you have dependents and you are not going to be earning your income anymore from your job and if you are concerned about your ability to live with the emotional impact of fluctuations then you might be a 30. So, every person should perform serious introspection and figure out where they should be. And the emotional content is very important because one things that you can’t do in investing is you can’t do the right thing if you can’t stand the pain. Everything that happens emotionally conspires us to make mistakes.

Most people get exicted better the things go, they feel better about stocks higher its price. They tend to buy more when the prices are at high levels and then when it turns down they get depressed and they get sad and they get rude the day they ever bought a stock and they tend to sell at low prices. That’s what most people do. How can we tell if that’s what most people do because stock go up and when they get too high then they tend to come down and most people are buying up here that’s what puts them up here and they’re selling down here that’s what puts them down here. So, emotion works to our destruction. You must figure out whether you can live with the emotional ups and downs and if you can’t there are other things you can do like you can turn your money to other people to manage and so on.

We don’t know what lies ahead in terms of the macro future. Few people if any know more than the consensus about what’s going to happen to the economy, interest rates and market aggregates. Thus, the investor’s time is better spent trying to gain a knowledge advantage regarding ‘the knowable’: industries, companies and securities. The more micro your focus, the great the likelihood you can learn things others don’t.

There are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third; you have to be right. Being a contrarian for its own sake is suicidal. Not being a contrarian at all means by definition you can’t outperform the market. Being genuinely contrarian means you are going to be uncomfortable sometimes. To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.

In Randomness by Nassim Taleb, he points out the difference between dentistry and investing. Dentistry doesn’t involve lot of creativity and randomness, investing on other hand if full of randomness and a lot of creativity which makes it super interesting.

Your philosophy will come from what you have been taught by the teachers and parents and what your experiences tell you about what things were taught and how they have to be modified.

Fooled by Randomness written by Nassim Taleb is either the most important badly written book in the history or the worst written very important book that you will ever read. (Don’t tell Nassim about this!)

The most important lesson I learned by reading “Decision Making under Uncertainty” by C. Jackson is you cannot tell an outcome whether the decisions was good or bad. But in real world, full of randomness, good decisions fail to work all the time and bad decisions they work all the time.

Number one you have to notice is there are lots of things that can happen so you have to allow them to happen. Number two is the thing that is most likely to happen is far from sure to happen.

Forecasts which are radically different from the recent past are potentially very valuable if they are correct.

The winning champion tennis player wins by hitting winning shots, the shots that opponent cannot return. The amateur tennis players on the other hand win by not hitting winning shots but by avoiding hitting losers. If we could hit it 20 times, and just get it over the net 20 times, our opponent could do only 19. We believe we could outlast him, we’ll out-steady him and eventually he will hit it into the net or out of the court.

Loser’s game: The game won by people who avoid being losers.

The investor analogy is that Great Investors hit the winners. They generate results from the unlikeliest of investments because they have the ability to hit winners that others can’t.

In one of the memos in March 2007 called “The Race to the Bottom”, I talked about when people are number one eager to invest and number two not sufficiently risk conscious they do risky things. And when people do risky things, the market becomes a risky place. And that’s why Buffet says, “The less prudence which others conduct their affairs, the greater the prudence with which we must conduct our own affairs”.

Exchanging ideas is extremely important and thinking broadly.

We learn a lot from tough times and failures and learn a relatively little from success. You put the money in the market it goes up, what have you learned. Number one it’s easy. Number two risk bearing pays. Number three There’s nothing to worry about. Those are horrible lessons.

We go through ups and downs, the question is are they random, inconsistent and not study able or there any patterns that recur that we learn to recognize. I think that if there are patterns we should try to recognize them if we try to impose patterns in an area where there are no patterns then that’s are folly.

Imagine if you were a baseball player, you have five trips to the plate and you make out on three of them and you kill yourself. The point is very few like Ted Williams who got two hits on every five hits and he was best in the history. Nobody gets 3 out of 5 or 4 out of 5. It’s the same in investing none of us get invited all the time, all we can do is have a better batting average than others.

The greatest thing I was ever taught was back around ’73 or ’74. Somebody said, “I’m going to tell you about the three stages of the bull market. In the first stage, just a few incredibly insightful people understand that there could be improvement. In the second stage, most people recognize that improvement is actually taking place. In the third stage, everybody and his brother believes that things will only get better forever.”

Investing is the only place where people buy less when things go on sale, and I think this is really important for investors and especially new investors to realize. Even Buffet says, “I like hamburgers. And when the hamburgers go on sale, I eat more hamburgers.”

I think I’ve been the luckiest person on the planet. And I think it was to that that people were responding. But I get into arguments with people and a lot of people say, “Oh—!” Well, what started the article is, I read a piece that quoted some Silicon Valley guy who says, “Success is never accidental. You make your own luck.” And I don’t agree. I think luck is a real thing and it’s important and it’s inherently unfair, but that’s life.

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.

Two of my most important observations:

  • Success in investing doesn’t come from buying good things, but from buying things well, and it’s essential to know the difference.
  • It’s not a matter of what you buy, but what you pay for it.

Every investment approach, even if skillfully applied, will run into environments for which it is ill suited. By and hold. Growth stocks. Value stocks. Small stocks. Large stocks. Foreign. Domestic. And that means that even the best of investors will have periods of poor performance. Nobody performs great all the time. Buffett was considered over with. Now, even if you are correct in identifying a divergence of popular opinion from eventual reality, that varying perception that I mentioned, it can take a long time for the price to converge with value and it can require something that acts as the catalyst. Underpriced does not mean “Going up tomorrow.”. Overpriced does not mean “Going down tomorrow.”. And we, everybody has to know that. And in order to be able to stick with an approach or decision until it proves out, which can be a long time, investors have to be able to weather periods when the results are embarrassing. This can be very difficult.

Success in gambling doesn’t go to those who pick winners, but to those with the ability to identify superior propositions. The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog. In other words, a mispricing. It’s exactly the same in investing. People often say to me, “XYZ is a great company with a bright future, so I bought the stock.” They’re picking a favorite but ignoring the proposition. The former alone isn’t enough; they should consider the latter as well.

Game selection versus skill – When considering where to invest, it’s important to understand both how much of the requisite skill you possess and the quality of the competition. Being a consistent winner among the best gamblers or in the most intensely competitive markets can be very difficult. Instead, your energy might be better spent looking for less-efficient niches. Unfortunately, it’s harder to find them than it was decades ago

Not having to play every hand – There’s no requirement to bet on every game or every hand. You can wait until you get a particularly attractive proposition, one that you feel particularly capable of analyzing and understanding, and where the odds are on your side. In the interim, it’s better to sit out and protect your bankroll.

Being able to make it through downturns - It’s important to have discipline when risking your capital,so that you can survive unfavorable periods and still be around when the winners show up. You have to avoid the risk of ruin, and this requires solid discipline (you must “never forget the six-foot-tall man who drowned crossing the river that was five feet deep on average”).To that end, good play isn’t just a function of relying on the expected value of your holdings and pure math,but also of thinking broadly about risk.

Circle of competence – Just because you’re great at gin rummydoesn’t mean you should play Texas Hold’em against aprofessionalpoker player.It’s important to know your strengths and stick to them.

The importance of not just winning and losing, but of maximizing wins and minimizing losses - Everyone will have both winners and losers. Various factors will determine the ratio. But the ability to assess propositions can enable you to win more on your winners than you lose on your losers. The size of your bet should take into account both the probability you are correct about who’s going to win and the asymmetry of the potential payout. “Getting your money in” when you have a great hand is one of the most important keys to winning at poker. You don’t get many great hands, so when you do, you have to be sure to take maximum advantage.

Second-level thinking - It’s not just how good your hand is. There’s much more. How good does youropponent think your hand is? How good do youthink your opponent’s hand is? How good does he think you think his is? How is that motivating his actions? The consistent winner has to be able to think at a higher, more complex level than the rest.

Overcoming emotion and biases – Human failings can cause gamblers to “chase” in poker(overstay in a hand in the hope of getting a lucky card), play loose (bet too much) when they’re “steaming” (smarting from losses and thus driven by heated emotion), and take bad doubles in backgammon. Hope, emotion and optimism are the gambler’s enemies.

Quotes

History does not repeat itself but it does rhymes. ~ Mark Twain

What a wise man does in the beginning, the fool does it in the end.

Being too far ahead of your time is indistinguishable from being wrong.

Move forward but with caution.

Perfect is the enemy of good.

It’s not what you don’t know that gets into trouble, it’s what you know for certain that just ain’t true. ~ Mark Twain

There aren’t too many things in life that are worth doing if they can’t be fun.

The cautious seldom error or write a great poetry.

The future does not exist. It’s only a range of possibilities. We have to understand that most outcomes will be determined by luck.

You can’t predict. You can prepare. ~ Stolen from an ad for Northwestern Mutual life insurance

Should does not equal will. Lots of things that should happen fail to happen.

We cannot live by the averages. (Six foot tall man drowns crossing the stream that was five feet deep on the average).

The great investors are the people who have made a lot of investments over a long period of time and made a lot of money, and their results show that it wasn’t a fluke — that they did it consistently.

In investing there is lot of randomness and creativity.

If we avoid the losers, the winners takes care of themselves.

You have to think different than everybody else. But in being different you have to be better.

Risk means more things can happen than they will. ~ Elroy Dimson

There are two types of forecasters : Those who don’t know and those who don’t know they don’t know. ~ John Kenneth Galbraith

If you want to be in top 5% of money managers, you have to be willing to be in the bottom.

It’s not what you buy. It’s what you pay.

For that which a man wishes that he will believe. ~ Demosthenes to Charlie Munger to Howard Marks

Now, just remember, none of investing is meant to be easy. Anybody who thinks it’s easy is stupid. ~ Charlie Munger to Howard Marks

The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple. ~ Charlie Munger

The less prudence which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. ~ Warren Buffet

It’s much easier to succeed by playing to ones’s stengths, than to fail by trying someone else’s.

If you name a price, don’t name a date, and if you name a date, don’t name a price, and then you can’t be wrong. ~ One of Howard’s partner

Scared money never wins. ~ Cartoon on the wall in Citibank

Not everything that can be counted counts and not everything that counts can be counted. ~ Maybe Albert Einstein

Experience are what you got when you didn’t get what you wanted.

Praise by name, criticize by category. ~ Warren Buffett

Future is not ours to know but ut helps but it helps to know that being wrong is inevitable and normal; not some terrible tragedy; not some awful failing and reasoning; not even bad luck. In most instances being wrong comes with a franchise of an activity whose outcome depends on an unknown future. ~ Peter Bernstein

Thankful heart is not only the greatest of all the virtues but it the parent of all the other virtues. ~ Marcus Cicero

We all have a lot to be thankful for and if we are not thankful for it then we are stupid.

Stories

The story about the kid with marshmallows. There was a psych experiment conducted about 40 years ago where they took bunch of 4-year old kid in the room one at a time with a table, two little spoons, a plate and marshmallows. The kid sat on one stool, the professor on the other. There’s a marshmallow, you can have marshmallow but I am going to leave the room for 10 minutes and if when I come back if marshmallow is still there you will get another one. And professor leaves the room and 80% of time the kid eats the marshmallows right away. (It’s urban myth but supposedly if they tracked the kids, the ones who waited were found to be more successful).

The reason the book is titled “The Most Important Things” is because I would find myself sitting in my client’s office and I would say the most important thing in investing is controlling risk. And then, five minutes later, I would say the most important thing is to buy at low price. And five minutes later, I would say the most important things is to act as contrarian.

When I was asked to revise the chapter on debt of the book on Security Analysis by Benjamin Graham and David Dodd for new revised edition in 2005, so while going through the 1940 edition I came across something fascinating. It said that the bond investing is a negative art. What it means, you are not going to be a hero by choosing among the bonds that are going to pay (fixed pay). The only thing that matter is to exclude the one’s that don’t pay. Negative Art: The greatness of what you buy doesn’t come from what you buy but what you exclude.

Warren Buffett has said that when a memo from Marks arrives, he drops everything to read it.

The story about why I wrote the book “The Most Important Things”. I started writing the memos in 1990; I wrote them for 20 years. I always concluded that I would write a book and pull them together into a philosophy when I retired, and then I got a letter from Warren Buffett in 2010 saying, “If you write a book, I’ll give you a blurb for the jacket.” So that was enough to get me off my ass and get me to do it in real time.

There’s a book out called The Warren Buffett Way, and I was asked to write the foreword for the latest edition, and I wrote something called “What Makes Warren Buffett Warren Buffett?” and I listed the things that characterize him: extremely high IQ, unemotional, great analyst, understands what’s important, looks at the things that are important and figures out their import, ignores the things that are unimportant, and on and on like that. The last one was one of the most important: he’s not afraid of getting fired. He doesn’t have to worry about the interim consequences of error. Most people do.