Howard Marks is legendary in the world of investing. His firm Oaktree Capital manages around $99 billion in assets. When he came to India earlier this year, he gave a very fascinating talk titled The Truth About Investing.
Here are four lessons that investors will benefit from.
You can invest with the best and still lose your money. Never ignore price.
There is no such thing as a good investment idea or a bad investment idea without reference to price. It’s not what you buy, it’s what you pay. Investing well is not about buying good things. It is about buying things well. If you don’t understand the difference, you are in big trouble.
Because it is not asset quality that determines investment risk. Most of the risk in investing comes not from the companies, institutions or securities involved. It comes from the behaviour of investors.
No asset is so good that it can’t be bid up to the point where it’s overpriced and thus dangerous. And few assets are so bad that they can’t become underpriced and thus safe. Since humans set security prices, it’s their behaviour that creates most of the risk in investing.
Superior results don’t come from buying high-quality assets, but from buying assets – regardless of quality – for less than they are worth. A low purchase price not only creates the potential for gain; it also limits downside risk. The bigger the discount from fair value, the greater the “margin of safety” an investment provides. You enhance return and reduce risk when you buy assets where the value is solid and the price is low.
Predictions of the macro future will not get you far in investing.
Investors would be wise to realise that they cannot see the future.
The 3 keys to success in investing are:
- Know the knowable (insight into companies and securities and industries)
- Control emotion
- Invest in a contrarian and counter-cyclical fashion; buy assets when everyone hates them. You get better bargains.
The most important choice that any investor can make is whether to be aggressive or defensive. Not whether it is stocks or bonds. Not whether it is domestic or international. Not whether it is developed world or emerging markets. Not big or small. Not risky or safe. But, is this a more important time to be aggressive or defensive? This decision can be made on observations regarding current conditions. They do not require guesswork about the future. Don’t act the same regardless of the market environment. Turn aggressive when there are bargains and defensive when everything is high.
To be a successful investor, you must have a process and philosophy you believe in and can stick to even under pressure.
Investors swing like a pendulum between greed and fear, euphoria and depression, credulousness and skepticism, risk tolerance and risk aversion. Usually they swing in the wrong direction – they warm to things after they have risen and shun them after they have fallen. The higher the stock goes the more they want to buy. Their motivation for selling increases as the stock price falls. Most investors behave pro-cyclically and it is to their detriment.
Since no approach will allow you to profit from all types of opportunities or in all environments, you have to be willing to not participate in everything that goes up, only the things that fit your approach.
Every investment approach, even if skillfully applied, will run into environments for which it is ill suited. Even the best of investors will have periods of poor performance. Nobody performs great all the time.
To be a disciplined investor, you have to be able to stand by and watch as other people make money in things you passed on. Warren Buffett, for instance, passed up on technology in 1999 and 2000 because he chose to. This is tough. In fact, the most corrosive of all human feelings is sitting by and watch others make money. Nobody likes that.
- Be disciplined.
- Invest in what you know.
- You don’t have to catch every trend to make money.
- Be patient. Underpriced does not mean going up tomorrow. Overpriced does not mean going down tomorrow.
Sometimes there are plentiful opportunities for unusual returns with low risks, the global financial crisis of 2008 threw up plenty of opportunities. Other times they are fewer and risky. It’s important to wait patiently for the former. When there’s nothing clever to do, it’s a mistake to try to be clever.
If you don’t have the courage of your convictions, patience and toughness, you cannot be a successful investor because you will be driven to fall in line by buying at the top and selling at the bottom.
Understand risk.
Many investors believe that riskier investments produce higher returns. So the way to make more money is to take more risk. That cannot be right. If riskier investments could be counted on to produce higher returns, they, by definition, would not be riskier.
Controlling risk is just as important as identifying opportunities for profit. Since Oaktree Capital Management’s expertise is in credit strategies, the company’s motto is that if they avoid the losers, the winners take care of themselves.
Risk has to be dealt with but I don’t believe in the science of risk management. People in the real world don’t care about volatility or demand a premium to bear it. They care about the likelihood of losing money, and the likelihood of losing money cannot be quantified. Risk is best handled by experienced experts applying subjective, qualitative judgment that is superior.
