Becoming a Superior Investor - Howard Marks

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01. uh you know there are so many things that you have to juggle at the same time to be a good investor that i wanted to share that with people you know and i think i said in the introduction that i am not writing to make investing easy i would rather write to show how hard it is because there are so many things that have to be juggled simultaneously but if you take an area like investing and you try to make it seem easy you're really doing people a disservice if we if we said to people you know you if you really spent some time on it you could do your own dentistry or your own legal work or fix your own car you know we wouldn't be doing people a favor and the same is true with investing for some reason while nobody does their own dentistry or auto repairs everybody thinks they can be an investor and if they're going to try i'm at least going to give them some of the considerations so one of the things in that 21 was knowing where we stand in the cycle now i think there are two among the 21 most important things i think two are really the most important except for the others and and they are number one risk and controlling risk because i think that re controlling risk is the mark of a professional anybody can make money when the market goes up and most of the time the market goes up and anybody who who takes above average risk can do above average when the market rises so achieving returns is not a point of distinction in good times in my opinion the distinction of a superior investor is achieving returns in good times with the risk under control because you never know when the environment is going to shift from favorable to unfavorable and the question is are you prepared you know somebody who if the market's up 10 and you're up 12 and the market's down 10 and you're down 12 you didn't accomplish anything the question is can you make more in the good times than you give back in the bad times and then i think the other thing that's most important is the cycle and where we stand in it i don't believe in predicting the future we never know where we're going we should understand the present and where we are in the present where the market is relative to its cycle tells you something about the odds that govern the future it doesn't tell you what's going to happen tomorrow but i believe that we can only understand since the world is an uncertain place filled with randomness we can't know what's going to happen in the future but those of us who see the world more clearly than others can have a superior understanding for the probability distribution that governs the future which what things can happen which are most likely which are somewhat likely which are unlikely if you have that consistently you are a superior understander and you can be a superior investor so i think the question is what today is the probability distribution that governs the future and and one of the things i say in the book which i which i'm happy with is that the future investment performance in particular for me is like a bowl full of lottery tickets you never know which ticket's going to be chosen sometimes the bowl has 70 winning tickets and 30 losing tickets sometimes it has 70 losing tickets and 30 winning tickets wouldn't it be nice to know the difference i think it's possible but you want it when when it's 70 winners and 30 loses you want to go all in you want to invest heavily in aggressive securities and you reach into the bowl or maybe the gods of fate reach into the bowl and they pull out a ticket and it's a loser so you know uh as my best friend bruce newberg says out in california when we play backgammon which is a game that's dominated by dice there are probabilities and outcomes we can get the probabilities on our side that does not ensure a favorable outcome but it's it's the only thing we can try to do so and that's what the book is all about how did you how did being a writer and author make you a better professional and specifically how is it accrued to oaktree to basically have you out in the public domain as an author when i write the memos i always think of something that i didn't have in mind before i started the memo i'll give you a simple example since we've been talking about risk and probabilities um you know six i wrote a memo with a clever title risk and i tried to put down everything that i could think of about risk that i knew and so i'm sitting there typing it out and i wrote that you can't measure risk in advance you can't quantify risk in advance and uh i think that's true you can't measure risk even after the fact you buy something for a hundred dollars a year later you sell it for 200 was it risky maybe the point is in my opinion you can't measure risk even after the fact and that's something that i this revelation i literally i literally hadn't thought about it before i sat down in the book when i was writing about psychology i realized that there was something that deserved that i hadn't planned to write about that deserved its own chapter and that was the cycle in attitudes towards risk because i think that the way people think about risk has an enormous impact on the market and it's changes volatility and people are supposed to be these computers who who look at risk-adjusted returns and make intelligent decisions on that basis and and nothing could be further from the from the truth when the market is doing well the economy is thriving and companies are reporting good profits and the media are telling good stories and everybody feels good what do they say risk is my friend the more risk you take the more money you make and i feel entirely comfortable taking risk today and by the way i don't see any risks on the horizon so bring it on and then for the next year or two the economy suffers corporate corporation profits disappoint the media now turned into telling scare stories the prices are cascading down and the motion goes through the floor and now what do people say risk bearing is just another way to lose money i don't care if i ever make a penny in the market again i just don't want to lose any more get me out at any price and this fluctuation in attitudes towards risks probably does more than any other one thing to influence the swings of the market and and again this is an idea that i had no thought that i would write a chapter about that so you know if you the great thing about writing is you have to think things through you