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In this video, we will share insights from Howard Marx and Joel Greenblatt. Howard Marks is one of the world's most respected investors and co-founder of Oak Tree Capital Management. Through his focus on risk management and market cycles, he has become one of the most influential voices in investing.
Oak Tree strategies have generated an average annual return of around 19% since inception. He is particularly known for his investor letters on risk, market psychology, and investment cycles. The letters are so appreciated that Warren Buffet has called them required reading. Even when focusing on real risk, there remains a challenge that all long-term investors face.
Markets move in cycles. Periods of optimism are followed by pessimism, which means that different strategies work differently in different phases. We have been clear that we are not trying to predict the next macro event or the next market movement. Instead, we try to build a portfolio and a process that is prepared for the cycles to come and go, even when it means periods of headwind.
So you asked what's the biggest mistake? And the biggest mistake is emotionality. People get excited when things are going well. We all like to see things go well, but when things are going well, uh people get excited and they tend to pay more for uh perhaps than they than they should. No, you have to that good news is not necessarily the same as good results.
If prices are too high, then good news may produce bad results. We cannot succumb to our emotions and get excited and buy when things are terrific and depressed and sell when things are that most investors be invested most of the time. of being able to get in and get out and get in and get out what we call marketing is not a good idea for most investors.
It's very hard to do you have to understand the market you have to stand the economy. You have to stun your psychology and you have to operate against your psychology. You have to buy when things are really bad and sell when things are really good. This is hard for most people. So I don't think that the average viewer should try market timing.
They should invest either all the time or almost all the time. Now it would be great to try to reduce your risk when the market is really high. If you can compound your money at 10% a year, it's a great accomplishment. The S&P 500, the main stock index in the United States has risen at about 10%. Since 1920.
Now since 1920 we have had 17 recessions, the great depression, several wars, including a world war. We have had a pandemic, many geopolitical problems, many economic problems. We still compound it at 10% a year. And if you put a dollar in the S&P in 1920 and you held it strongly, you never bought, you never sold, you know what you have today?
8000. That's the magic of compound growth without interruption. What Mark points out here is something we believe is crucial to long-term success. Most investors underestimate how much return is lost by trying to predict and time the market. People sell after declines and buy after increases, often in exactly the wrong part of the cycle.
Our philosophy is instead based on accepting that cycles cannot be avoided. Interest on interest builds value over time, but only if it is allowed to work undisturbed. Every time you sell on emotion, jump between strategies, or try to time the market, you break that process. As Charlie Munger puts it.
The first rule is not to interrupt interest on interest unnecessarily. Joel Greenblatt is one of the world's most successful value investors, founder of Gotsam Capital and professor at Columbia Business School. He is particularly known for his ability to make investments easy to understand and for his focus on buying good companies at the right price.
When you accept that markets move in cycles and that different strategies work differently in different phases, the next challenge arises. It is not enough to have a well-thought-out investment philosophy. You also have to be able to follow it when it doesn't work in the short term. In our investor letters, we have repeatedly written that periods of relative headwind are not a sign that the process is wrong.
On the contrary, it is often precisely these periods that are the explanation for why the strategy works over time. Joel Greenblatt has described this very clearly when he explains why value-based strategies both work and are so difficult to implement in practice. I mean who can afford except for you to really withstand the kinds of you know the human behavior where you know they'll flee if you underperform for three years.
that has not worse in short termism hasn't it gotten tougher to really to be in a position where you can actually investic to my ears mean you're telling me it's hard for other people to do which will make the opportunity stay forever because it's very hard to do uh if you know true north if you have home base which is stocks ownership shares of businesses and you're good at valuing them and you can stick to it you can beat the index that people stay with us what I am saying is that the end of the day I have investors at the end of this stream of earnings that I'm trying to create by investing well and I want as many people to stay on the ride with us as possible time horizons are shrinking you can check price 30 times a second so if you are patient uh and have a longer term horizon.
Even two or three years nowadays is a long horizon. It should be longer, but even two or three years you have a big edge. And what's your home base? Your home base is valuation. That's what stocks are. They're not pieces of paper that bounce around. They are ownership shares of businesses that we value and try to buy a discount.
If we're good at that and disciplined at that and stick to that discipline, the market is giving us pitches all over the place. What The Green Blood describes here is something we think is central to understanding. If a strategy were to work well all the time in all market conditions, it would quickly stop working.
This is precisely why periods of underperformance are built into strategies that work across the entire cycle. This means that we sometimes own companies that are not the market's favorites. That we sometimes deviate from the index and that the results in the short term can feel thankless. But it is also precisely this discipline that allows us to benefit from the valuation differences that arise when other investors lose patience.
Greenblad's message is simple. Strategies that work over time will not work all the time. But understanding it is one thing. Living by it is something else entirely. Therefore, we turn to Peter Lych in the next video, who said that the investor's biggest opponent is rarely the market, but rather their own emotions.
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