Notes from Howard Marks
Notes from reading Howard Marks memos
What doesn’t matter
Trading mentality
Short term performance
Volatility
Hyper-Activity
So What Does Matter?
What really matters is the performance of your holdings over the next five or ten years (or more) and how the value at the end of the period compares to the amount you invested and to your needs.
Forget 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?
Decide whether your approach will lean more toward aggressiveness or defensiveness. Will you try to find more and bigger winners or focus on avoiding losers, or both? Will you try to make more on the way up or lose less on the down, or both? (Hint: “both” is much harder to achieve than one or the other.) In general, people’s investment styles should fit their personalities.
Think about what your normal risk posture should be – your normal balance between aggressiveness and defensiveness – based on your or your clients’ financial position, needs, aspirations, and ability to live with fluctuations. Consider whether you’ll vary your balance depending on what happens in the market.
Adopt a healthy attitude toward return and risk. Understand that “the more return potential, the better” can be a dangerous rule to follow given that increased return potential is usually accompanied by increased risk. On the other hand, completely 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. Recognize that trying harder isn’t enough.
Recognize 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. Profit if you can by being counter-cyclical and contrarian.
Study conditions in the investment environment – especially investor behavior – and consider where things stand in terms of the cycle. Understand that where the market stands in its cycle will strongly influence whether the odds are in your favor or against you.
Buy debt when you like the yield, not for trading purposes. In other words, buy 9% bonds if you think the yield compensates you for the risk, and you’ll be happy with 9%. Don’t buy 9% bonds expecting to make 11% thanks to price appreciation resulting from declining interest rates
Most people buy stocks with the goal of selling them at a higher price, thinking they’re for trading, not for owning
Are the buyers buying because this is a company they’d like to own a piece of for years? Or are they merely betting that the price will go up?
Never confuse brains and a bull market
While none of this is easy, as Charlie Munger once told me, carefully weighing long-term merit should produce better results than trying to guess at short-term swings in popularity.