Howard Marks’ 10 Key Elements for Investing

The Australian Financial Review2022-11-23

In late 2017, with the US economy finally starting to recover from the GFC, legendary Wall Street titan Howard Marks kept being asked the same question, over and over again: when will interest rates ...

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Comments

sptang
2022-11-23
sptang
👍
JohnL
2022-11-23
JohnL
Howard Marks is one of my favourite investment gurus. I enjoy listening to him much because he can put things in easily understood contexts. When I feel panic because of draw down, I will check out his videos and memos. He is a great guy of intellectual humility. Worth every second to hear his speech.
- Sonoma:
  Thank you for sharing
- Michaaeel:
  👍
- CHYEN:
  [微笑]
- tks_82:
  ok
- Alexngo:
  K
Chloe26
2022-11-23
Chloe26
Ok

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David Rowe“Why do you care?” he said. “If I say ‘February’, what will you do? And if I later change my mind and say ‘May’, what will you do differently? If everyone knows rates are about to rise, what difference does it make which month the process starts?”No one ever offered a convincing answer, Marks says in his latest memo.“Investors probably think asking such questions is part of behaving professionally, but I doubt they could explain why.”There is no shortage of parallels between Marks’ experience seven years ago and what’s happening today, in a market that’s become obsessed with macroeconomic events.In 2015, the question of when rates would rise was on everyone’s lips, but today the frequently asked questions are about when inflation will peak, or when the Federal Reserve will finally cut rates.Marks’ message has not changed. Not only can the majority of investors not hope to predict macroeconomic events, but they have even less chance of accurately predicting the market’s reaction to them.More than this, though, Marks argues that this stuff doesn’t matter. Too many investors get caught up in short-term gyrations in markets that have little impact on ultimate long-term performance.“Macro events and the ups and downs of companies’ near-term fortunes are unpredictable and not necessarily indicative of, or relevant to, companies’ long-term prospects. So, little attention should be paid to them.”Marks’ latest memo, which is called What Really Matters, has extra significance for this column, given Marks let slip the title when he spoke to The Australian Financial Review during an interview in Sydney.Despite the title, the memo is mainly about what doesn’t matter – starting with short-term events.Marks’ view that trying to interpret daily movements in share prices is a mug’s game is particularly relevant in today’s market.As New York-based hedge fund manager Ricky Sandler, of Eminence Capital, told the Sohn Hearts & Minds conference last Friday, the rise and rise of passive investing – now 55 per cent of the market, up from about 25 per cent a decade ago – means share prices no longer reflect fundamental value.“In the past, we used to look at a stock that was acting well, and you think the market is coming around to your view, but now you can just be caught up in a six-week factor trade,” he said.But Marks would say stock price movements over weeks and months never really provided much information about fundamental value because this is not how companies work.Which brings Marks to his second thing that doesn’t matter: a trading mentality.“Most people don’t start companies with the goal of selling them in the short term, but rather they seek to operate them, enjoy profitability, and expand the business.“Of course, founders do these things to ultimately make money, but they’re likely to view the money as the byproduct of having run a successful business.”But Marks argues investors have increasingly come to view stocks not as fractional ownership of a business, but as a tool for profit.“[Warren] Buffett says people who buy stocks should think of themselves as partners of owners with whom they share goals. But I think that’s rarely the case. Most people buy stocks with the goal of selling them at a higher price, thinking they’re for trading, not for owning.”But success in trading is not the mark of a successful investor, Marks says, because short-term performance – particularly over a quarter but even over a year – also doesn’t matter. Not only can it be influenced by random events, but it probably reflects more on an investor’s aggressiveness (particularly in a period of rising market) than it does skill or even timing.Perhaps more surprisingly for an investor who has made a career out of finding and exploiting distressed opportunities, Marks also says volatility doesn’t matter nearly as much as investors think.Partly, this comes down to what he sees as misdiagnosis of what volatility is. “I define risk as the probability of a bad outcome, and volatility is, at best, an indicator of the presence of risk,” he says.But Marks says too many investors react emotionally to volatility, rather than financially. For long-term investors, some volatility should actually be welcome, given lower volatility should mean lower returns, all things being equal. Marks quotes Buffett’s famous maxim: a lumpy 15 per cent is better than a smooth 12 per cent.So, after all that, what does matter? Marks’ answer is simple. “What really matters is the performance of your holdings over the next five or 10 years [or more], and how the value at the end of the period compares to the amount you invested and to your needs.”In other words, forget macro trends, focus on fundamentals such as earnings potential, and buy stocks and bonds that look cheap relative to this.And then, try to do as little as possible.“Hold on to them as long as the company’s earnings outlook and the attractiveness of the price remain intact, and make changes only when those things can’t be reconfirmed, or when something better comes along,” Marks says.“Investors should find a way to keep their hands off their portfolios most of the time.”To finish, Marks offers 10 key things that he believes should be front of mind for investors, which he says are a sort of greatest hits collection from his memos over the years.The list, summarised below, might sound obvious to many experienced investors. But in an environment where this columnist feels like the markets (and himself) are gyrating according to the latest piece of macro data, these lessons feel timely and important.Howard Marks’ 10 elements for investorsForget the short run – only the long run matters.Decide whether you believe in market efficiency. If so, is your market sufficiently inefficient to permit outperformance, and are you up to the task of exploiting it?Does your investment style match your personality? Do you tend more towards aggressiveness or defensiveness? Will you try to find more and bigger winners, or focus on avoiding losers, or both? (Hint: “both” is much harder to achieve than one or the other.)Think of your normal balance between aggressiveness and defensiveness based on your financial position, needs, aspirations, and ability to live with fluctuations. Will you vary this balance depending on what happens in the market?Adopt a healthy attitude towards return and risk. Understand that higher returns are usually accompanied by increased risk, while avoiding risk usually leads to avoiding return as well.Insist on an adequate margin of safety, or the ability to weather periods when things go less well than you expected.Stop trying to predict the macro; study the micro like mad in order to know your subject better than others. Understand that you can expect to succeed only if you have a knowledge advantage, and be realistic about whether you have it or not.Recognise that psychology swings much more than fundamentals, and usually in the wrong direction or at the wrong time. Understand the importance of resisting those swings and profiting if you can by being counter-cyclical and contrarian.Study conditions in the investment environment – especially investor behaviour – and consider where things stand in terms of the cycle. Where the market stands in its cycle will strongly influence whether the odds are in your favour or against you.Buy debt when you like the yield, not for trading purposes. In other words, buy 9 per cent bonds if you think the yield compensates you for the risk, and you’ll be happy with 9 per cent. Don’t buy 9 per cent bonds expecting to make 11 per cent thanks to price appreciation resulting from declining interest rates.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":9968687232,"gmtCreate":1669212115527,"gmtModify":1676538167825,"author":{"id":"3552548580314246","authorId":"3552548580314246","name":"sptang","avatar":"https://static.tigerbbs.com/7bcf5804031a37b3f7e5a3b797aebd40","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"👍","listText":"👍","text":"👍","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9968687232","repostId":2285896938,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9968685174,"gmtCreate":1669211349798,"gmtModify":1676538167738,"author":{"id":"3570369418287680","authorId":"3570369418287680","name":"JohnL","avatar":"https://community-static.tradeup.com/news/20db2fa4f65cb04a8d837d400a1b5d7b","vip":1,"crmLevel":5,"crmLevelSwitch":1},"htmlText":"Howard Marks is one of my favourite investment gurus.&nbsp;I enjoy listening to him much because he can put things in easily understood contexts. When I feel panic because of draw down, I will check out his videos and memos. He is a great guy of intellectual humility. Worth every second to hear his speech.&nbsp;","listText":"Howard Marks is one of my favourite investment gurus.&nbsp;I enjoy listening to him much because he can put things in easily understood contexts. When I feel panic because of draw down, I will check out his videos and memos. He is a great guy of intellectual humility. Worth every second to hear his speech.&nbsp;","text":"Howard Marks is one of my favourite investment gurus. I enjoy listening to him much because he can put things in easily understood contexts. When I feel panic because of draw down, I will check out his videos and memos. He is a great guy of intellectual humility. Worth every second to hear his speech.","images":[],"top":1,"highlighted":2,"essential":1,"paper":1,"likeSize":35,"commentSize":32,"repostSize":0,"link":"https://ttm.financial/post/9968685174","repostId":2285896938,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":104930615,"gmtCreate":1669212179415,"gmtModify":1669212193369,"authorId":4098179819346360,"author":{"id":4098179819346360,"authorId":4098179819346360,"name":"Sonoma","avatar":"https://static.tigerbbs.com/4098eaa317ca2e23cbc92dde6b556518","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":9968685174,"type":1,"supId":0,"prevId":0,"content":"<span class=\"s1\">Thank you for sharing</span>","text":"<span class=\"s1\">Thank you for sharing</span>","html":"<span class=\"s1\">Thank you for sharing</span>"},{"id":104930603,"gmtCreate":1669212111461,"gmtModify":1669212124375,"authorId":3581997705573752,"author":{"id":3581997705573752,"authorId":3581997705573752,"name":"Michaaeel","avatar":"https://static.tigerbbs.com/26129e9b572f3373f16fd27c6da73f44","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":9968685174,"type":1,"supId":0,"prevId":0,"content":"👍","text":"👍","html":"👍"},{"id":104930600,"gmtCreate":1669212103842,"gmtModify":1669212116878,"authorId":3582541642420431,"author":{"id":3582541642420431,"authorId":3582541642420431,"name":"CHYEN","avatar":"https://static.tigerbbs.com/45cce282f39aede3b34c0edb3149ff09","vip":1,"crmLevel":4,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":9968685174,"type":1,"supId":0,"prevId":0,"content":"<span class=\"s1\">[微笑]</span>","text":"<span class=\"s1\">[微笑]</span>","html":"<span class=\"s1\">[微笑]</span>"},{"id":104930595,"gmtCreate":1669212093883,"gmtModify":1669212107073,"authorId":3581754084854007,"author":{"id":3581754084854007,"authorId":3581754084854007,"name":"tks_82","avatar":"https://community-static.tradeup.com/news/3547658cb0a496157138bc30326aa3d7","vip":1,"crmLevel":2,"crmLevelSwitch":1,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":9968685174,"type":1,"supId":0,"prevId":0,"content":"<u>ok</u>","text":"<u>ok</u>","html":"<u>ok</u>"},{"id":104930593,"gmtCreate":1669212090881,"gmtModify":1669212103952,"authorId":3571882312755933,"author":{"id":3571882312755933,"authorId":3571882312755933,"name":"Alexngo","avatar":"https://community-static.tradeup.com/news/223e039a4ee6d691503ce2aee951d200","vip":1,"currentWearingBadge":{"badgeId":"972123088c9646f7b6091ae0662215be-3","templateUuid":"972123088c9646f7b6091ae0662215be","name":"Legendary Trader","description":"Total number of securities or futures transactions reached 300","bigImgUrl":"https://static.tigerbbs.com/656db16598a0b8f21429e10d6c1cb033","smallImgUrl":"https://static.tigerbbs.com/03f10910d4dd9234f9b5702a3342193a","grayImgUrl":"https://static.tigerbbs.com/0c767e35268feb729d50d3fa9a386c5a","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2023.02.11","exceedPercentage":"93.81%","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1100},"crmLevel":4,"crmLevelSwitch":1,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":9968685174,"type":1,"supId":0,"prevId":0,"content":"<u>K</u>","text":"<u>K</u>","html":"<u>K</u>"}],"langContent":"EN"},{"id":9968635018,"gmtCreate":1669203561534,"gmtModify":1676538166835,"author":{"id":"3572841098185467","authorId":"3572841098185467","name":"Chloe26","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":1},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9968635018","repostId":2285896938,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":17,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2285896938"}