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When we're at our peak and people are cheering, saying, "Hey, this is going to last forever." Usually it will eventually collapse under its own weight, I think we can make a profitable prediction. The only thing, Mykola, we don't have many options. I was talking to my son when I was writing that book about cycles, and I said, " You know, I think my market predictions were pretty accurate ." He says, "Yes, Dad.
That's because you've done it five times in 50 years." Five times the market was at such an extreme point that regression to the mean was reliable. If you want to know how to make money on investments and even avoid losses during the next stock market crash, you should listen to the legendary Howard Marks.
Luckily for us, in a recent interview, Marx shared his six investment principles for successful investing. These are the very principles he used to become a billionaire and build his firm, Oak Tree, making it one of the most successful on Wall Street. Now let 's get down to business. Howard Marks' first investment principle is the concept of risk control.
What is your investment philosophy now? What is it? My philosophy, I think, is the Oak Tree philosophy. Six very simple points. Number one— risk control. I think it's easy to make money in the market. This is especially true of successful years, and most years are successful. The challenge, the real skill, is to make money while controlling your risks so that in the event of a bad year you don't lose too much.
There's an old saying in investing that during a bull market, everyone is a genius. When stock prices rise rapidly, it makes people feel like stock market geniuses. However, according to Howard Marks, the true test of investment prowess is not how you perform when prices are skyrocketing . Instead, it's how you act when the stock market falls.
To illustrate what Howard Marks means , let's take the example of Katie Wood, portfolio manager at Ark Innovation Fund. Katie Wood has made incredibly impressive returns in the era of zero interest rates, when loss-making technology companies and SPACs have seen their stock prices skyrocket. Wood received 87% of the income in 2017, 36% in 2019, and a staggering 153% in 2020 .
These results have led some to even call her the next Warren Buffett. However, rising interest rates due to persistently high inflation led to a collapse in the share prices of speculative companies in which Katie Wood invested. This led to a negative return of 24% in 2021 and a huge drop of 67% in 2022.
Such sharp declines in Katie Wood's fund transformed her from "the next Warren Buffett" to one of the biggest wealth destroyers of the decade, according to Morningstar, costing her investors a total of $14 billion. Over the past 5 years, the ARK Innovation ETF managed by Wood has shown a total return of about 12%.
Compare this to the S&P 500 index's return of 88% over the same period . This 12% is before taking into account the 0.75% annual fee that Wood charges its investors. Taking these fees into account, Wood investors would be better off keeping their money in a high-yield savings account. The story of Katie Wood's rise and fall perfectly demonstrates Howard Marks' concept of risk control.
It is not enough to show high results only during a bull market. Equally, and perhaps more importantly, is avoiding losses when the stock market inevitably deteriorates. This brings us to Howard Marks' second investment principle— consistency. Listen. Number two is consistency. My clients don't want results that constantly fluctuate , like being at the top one year and at the bottom the next.
So we try to be consistently slightly above average, but through risk control in really bad years we come out on top. I'm going to reveal to you one of the biggest secrets of how to get rich from investing. Are you ready for this? The secret to wealth through investments is not what most people think.
It's not about finding the next Apple or Nvidia stock, although that certainly wouldn't hurt. Instead, the secret to wealth in the stock market is consistency. Let me show you what I mean. Meet me, this is John. John invested $25,000 when he was 20 years old. Assuming a 7% return, how much money do you think John will have at age 65?
Seriously, take a second to guess. So, you have a number in your head. Perfectly. The answer is over half a million dollars. This is simply incredible. All thanks to a boring but consistent 7% return. What if we increase this return to 8%? That half-million number jumps to an impressive $800,000. And at 9%, that number soars to a staggering $1.2 million.
This example demonstrates the incredible power of consistency in creating wealth. Consistency allows compound interest to work wonders. But how exactly can such stable profits be ensured? This brings us to item number three on the list. Focus on inefficient markets. Number three, I believe in the existence of market efficiency, and we only target less efficient markets.
Well, first of all, I think market efficiency is a very important concept. My years of experience as an investor have shown me why this is so and introduced me to the limitations of knowing more than others. One of the most important pieces of advice I've learned from studying investment legends like Howard Marks, Charlie Munger, and Warren Buffett is the importance of focusing on investing in so- called inefficient markets.
When Howard Marks talks about investing in inefficient markets, he means looking for opportunities in areas where you are most likely to find assets trading at prices that do not reflect their true value. This may be caused by a lack of information, limited competition, or incorrect pricing. Howard Marks' investing career really took off when he started investing in high-yield bonds in the late 1970s.
High-yield bonds are often called " junk" because they are bonds of companies that are considered very risky. At that time, only a few investors were willing to spend time analyzing these bonds, as they were perceived as too risky to be good investments. As a result, Howard Marks had very little competition, which allowed him to make incredible profits in this inefficient market.
This concept of focusing on inefficient markets aligns perfectly with Howard Marks' fourth investment principle . Be a specialist, not a generalist. Number four, a high degree of specialization. In my opinion, you cannot be a successful generalist. You should know about a few things more than anyone else.
There are people who believe that , for example, artificial intelligence stocks are in a “ bubble,” and most bubbles arise around something new that amazes everyone. I don't know enough about AI to say whether it's excessive or justified. When Marx talks about the importance of specialization in investing, he is referring to a concept known as the “circle of competence.” The “circle of competence” is the idea that investors should focus on industries, companies, or asset classes that they deeply understand and avoid going beyond their expertise.
Note how Marx, when raising the topic of a potential “ bubble” in AI stocks, immediately noted that artificial intelligence lies far beyond his remit. This is the type of humility that is absolutely critical to successful investing. To determine your area of expertise, ask yourself which industries or products you know better than 99.9% of the population.
Maybe you run a large retail store. You can understand that a company like Costco has a business model that is significantly better than any competitor. Maybe you're a software engineer and you spot a fast-growing software company with a great software product. You may even be a real estate agent and have a unique understanding of the market that professional investors cannot replicate.
Determining your scope of competence is the easiest thing to do. It 's harder to make sure you don't go beyond its limits. Your scope of expertise doesn't have to be vast. It just needs to be clearly defined. As Warren Buffett says, the size of your circle isn't that important. However, knowing its limits is vital.
Stick to what you understand and only expand your scope as you gain deeper knowledge and experience. The fifth item on Howard Marks' list is to ignore economic forecasts. Here he explains it himself. Fifth: we do not rely on macroeconomic forecasting when making investment decisions . My experience with forecasters has shown, in my opinion, that this does not work.
Macroeconomic forecasting... all macroeconomists are useless. Well, you said it. No, no, yours was a question. Sorry. I, I...my intonation was wrong. I would say they are not right often enough to be worth listening to. And you know, when I started at the bank 55 years ago, we said that an economist is a portfolio manager who never evaluates the market.
And I think that's true. And you know, if you were an active investor, you wouldn't hire someone without looking at their performance. But no economist ever shows their statistics. No, they can't, because no one would hire them. In one of his legendary investment notes, Howard Marks explained: for information to be important for an investment decision, it must meet two criteria.
Information must be, firstly, important, and secondly, recognizable. Of course, the state of the economy is critical to the potential success of investments. The strength or weakness of the economy affects a company's profitability and, ultimately, the value of its shares. Undoubtedly, economic forecasts meet the first criterion and are important.
However, regarding the second criterion— recognizability—it is here that economic forecasts fail to pass the test. Economic forecasts have such low accuracy that the chances of them coming true are comparable to flipping a coin. This is how Marx explained in his note " The Illusion of Knowledge" why the results of economic forecasts leave much to be desired .
To create something useful, whether in manufacturing, science, or even art, you must have a reliable process capable of transforming the necessary inputs into the desired output. In short , the problem is that I don't think there can be a process that can consistently convert the vast number of variables in the economy and markets into a useful macro forecast.
These notes from Marx were incredibly helpful for my own journey in learning about investing. Howard Marks spent decades creating his legendary notes on the secrets, strategies, and tactics of successful stock market investing. Warren Buffett even said, “When I see Howard Marks’ notes, they’re the first thing I read.” But with hundreds of pages to work through, it can be overwhelming.
That's why we've selected his most important lessons into the ultimate risk management guide from Howard Marks. Download it for free from the link in the description. We saved the best for last. Principle number six on Howard Marks' list. Don't try to guess the market timing. Number six: we don't expect much from trying to guess market timing.
So, that's what philosophy is all about. You reject forecasting, but at the same time believe in the importance of understanding where we are in the cycle. Doesn't this contradict each other? At first glance, it sounds like it. But I believe there is a time when forecasting becomes more useful, and that is when we are at an extreme point.
Think about what I said a moment ago: the biggest mistake people make is believing that a process that once worked will continue indefinitely. This is what drives markets to extreme heights that we call bubbles and to lows that we call crashes. But when we're at an extremely high level, and people get excited, saying, "Hey, this is going to last forever." Usually, eventually, it collapses under its own weight.
So when the market is crazy high or crazy low, I think we can make a profitable prediction. The only thing, Nikolai, is that we don't have many such opportunities. M. I was talking to my son when I was writing a book about cycles and I said, "You know, I think my market predictions were pretty accurate." He says, “Yes, Dad.
" That's because you've done it five times in 50 years." The market has already reached such an extreme point five times that a return to the mean was inevitable. Not in terms of when it will happen, what will cause it, or how quickly it will happen, but in the very fact that it will happen. So, we have what we have.
These six investment principles were extremely important to Howard Marks throughout his career, allowing him to become a billionaire and build one of the most respected investment firms in the world. If you've watched the video up to this point, it's obvious that you're serious about investing. Since that's the case, be sure to check out this video with Howard Marks, because as you can see in the comments, it has had a huge positive impact on people. See you there .
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