1. “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” 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. Howard Marks: “The absolute best buying opportunities come when asset holders are forced to sell.”
2. “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.” Nothing good or bad goes on forever. And yet people extrapolate sometimes as if a phenomenon will go on indefinitely. “If something cannot go on forever it will eventually stop” famously said Herbert Stein. Situations in which mean reversion does not happen are rare enough as to make a mean reversion assumption a consistent friend to the investor.
3. “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.” Focusing on the simplest possible system (an individual company) is the greatest opportunity for an investor since a company is understandable in a way which may reveal a mispriced bet. Howard Marks puts it simply: “We don’t make macro bets.”
4. “We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.” This video has excellent material from Marks on why trying to make macroeconomic predictions is bound to fail: https://www.youtube.com/watch?v=2It1fzcBoJU 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?” Howard Marks notes that anyone can be right “once in a row” especially when the range of possible outcomes is small.
5. “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. Howard Marks adds: “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.”
6. “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.” By focusing in the mathematics associated with value investing you are in a better position to shut out psychological dysfunction. Value investing is like mediation and the intrinsic value calculation is the mantra.
7. “The future does not exist. It’s only a range of possibilities. We have to understand that most outcomes will be determined by luck.” *Every* great investor in this “Dozen Things” series of blog posts thinks in terms of expected value. There are no exceptions. Howard Marks: “The expected value from any activity is the product of the gains available from doing it right multiplied by the probability of doing it right, minus the potential cost of failing in the attempt multiplied by the probability of failing.”
8. “Leverage magnifies outcomes, but doesn’t add value.” Leverage magnifies results whether good or bad. “Volatility + leverage = dynamite.” It is wise to always have a Margin of Safety.
9. “You can’t predict. You can prepare.” Some aspects of life have an unknown probability distribution and some potential future states are unknown. One can deal with this by being anti-fragile and having a margins of safety. Will doubling your money make you twice as happy? Would you really like to take the change that you might need to “return to go” and start over?
10. “In both economic forecasting and investment management, it’s worth noting that there’s usually someone who gets it exactly right… but it’s rarely the same person twice. The most successful investors get things ‘about right’ most of the time, and that’s much better than the rest.” The poseur in the magazine or on the deck of a big yacht is often lucky rather than good. Don’t confuse luck with skill and work as if you need to be skillful rather than lucky. In reviewing Mauboussin’s book “The Success Equation Marks wrote: “in fields where luck plays a big part, like investing, outcomes are of limited relevance in assessing performance.”
11. “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.” Persistent success is strong evidence of skill rather than luck generating a given set of results.
12. “I keep going back to what Charlie Munger said to me, which is none of this is easy, and anybody who thinks it is easy is stupid. It is just not easy. There are many layers to this, and you just have to think well.” If you are not willing to do the work or feel like you have the wrong emotional temperament, buy low fee index funds. Dumb money becomes smart once it accepts its limitations.