Design by Artis Briedis
I have to confess that I knew too little about Howard Marks and had not been following him before. I found this video more by accident and was very impressed both with the clarity of his messages and the quality of delivery.
As a co-founder of Oaktree Capital Management, a distressed securities investor, Howard has built almost a legendary reputation as a successful investor, becoming a billionaire himself in the process. During his long career spanning many decades, he has also found time to publish several books including “The Most Important Thing: Uncommon Sense For The Thoughtful Investor” and “Mastering The Market Cycle: Getting The Odds On Your Side” (and yes, I will probably receive a small commission if you click on any of the links and decide to buy these or other books referred to in this note).
Here are my three takeaways after watching his lecture at Google offices some years ago on YouTube:
Lesson #1
It is likely to be one of the most under-appreciated truths – you can’t tell from the outcome whether the decision leading to it was right or wrong. In real life, there is too much randomness. The randomness explains why good decisions could fail, while bad decisions could work.
Referring to Nassim Nicholas Taleb’s book “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets”, Howard argues that a lot of things can happen, and you have to allow for them when making decisions. Also, the thing that is most likely to happen is far from sure to happen.
Usually, the decision-making process consists of modelling different possible outcomes, assigning probabilities to them and choosing the option which generates the highest expected value. However, this will not always work – there might be some outcomes which, if and when they occur, are unacceptable thus changing the analysis.
Lesson #2
The parable from the tennis world suggests that professional players win by hitting the winning shots, or winners, while amateurs win by avoiding hitting losers. More on that in Charles D. Ellis’s book “Winning The Loser’s Game: Timeless Strategies For Successful Investing”.
Bond investing is a negative art – it does not matter which ones you pick, provided that they survive and pay. Which emphasises the importance of excluding the ones that don’t pay. In a negative art, greatness comes from not what you buy but from what you exclude.
Lesson #3
Macroeconomic forecasts are of little value in making investment decisions. Most of the time the forecasters get it right only because nothing has changed. In economics extrapolation tends to work – usually, the future looks very much like the recent past.
All people who are right extrapolating will make no money. Only the forecasts of radical change can make money – provided that they are correct. Unfortunately, it is very hard to make deviant forecasts correctly and to do it consistently.
And, as a final note, Howard reminds us that you should always keep in mind the lesson from the story about the 6-foot-tall man who drowned in a stream that was only 5 feet deep on average. We can’t rely on and live on averages alone.
For those willing to try and pick top lessons of their own here is the link to the video.
* from anything that you are reading, watching or hearing you can realistically expect to remember only a limited number of things. My solution is to pick just 3 items or ideas from any material. This number is non-negotiable. Even the most extraordinary experience gets compressed into 3 things to remember. This approach has worked well for me.
This note was first published on medium.com on 30 October 2024.
Aivars Jurcans has more than 20 years of corporate finance and investment banking experience. His services are currently available through Murinus Advisers. More of his writings can be found on his page Corporate Financier’s Notes.
