Investing in a Nutshell

Investing in a Nutshell

In lieu of all the market turbulence that's been going on lately, I thought I would pass along these words of wisdom from Howard Marks. These quotes can be found in the first chapter of his last book, "Mastering the Market Cycle."

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Investing is a matter of preparing for the financial future. It’s simple to define the task: we assemble portfolios today that we hope will benefit from the events that unfold in the years ahead. 

For professional investors, success consists of doing this better than the average investor, or outperforming an assigned market benchmark (the performance of which is determined by the actions of all the other investors). But achieving that kind of success is no small challenge: although it’s very easy to generate average investment performance, it’s quite hard to perform above average. 

One of the most important foundational elements of my investment philosophy is my conviction that we can’t know what the “macro future” has in store for us in terms of things like economies, markets or geopolitics. Or, to put it more precisely, few people are able on balance to know more about the macro future than others. And it’s only if we know more than others (whether that consists of having better data; doing a superior job of interpreting the data we have; knowing what actions to take on the basis of or our interpretation; or having the emotional fortitude required to take those actions) that our forecasts will lead to outperformance. 

In short, if we have the same information as others, analyze it the same way, reach the same conclusions and implement them the same way, we shouldn’t expect that process to result in outperformance. And it’s very difficult to be consistently superior in those regards as relates to the macro.

So, in my view, trying to predict what the macro future holds is unlikely to help investors achieve superior investment performance. Very few investors are known for having outperformed through macro forecasting. 

Warren Buffett once told me about his two criteria for a desirable piece of information: it has to be important, and it has to be knowable. Although “everyone knows” that macro developments play a dominant role in determining the performance of markets these days, “macro investors” as a whole have shown rather unimpressive results. It’s not that the macro doesn’t matter, but rather that very few people can master it. For most, it’s just not knowable (or not knowable well enough and consistently enough for it to lead to outperformance). 

Thus I dismiss macro prediction as something that will bring investment success for the vast majority of investors, and I certainly include myself in that group. If that’s so, what’s left? While there are lots of details and nuances, I think we can most gainfully spend our time in three general areas:

trying to know more than others about what I call “the knowable”: the fundamentals of industries, companies and securities, 

being disciplined as to the appropriate price to pay for a participation in those fundamentals, and

 understanding the investment environment we’re in and deciding how to strategically position our portfolios for it.

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Source

Mastering the Market Cycle

Chapter One, Why Study Cycles?

Howard Marks