A Message from Howard Marks
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This is the final paragraph in Howard Mark's first book, "The Most Important Thing". In lieu of the overexuberance we are experiencing in the market at this time, I feel it beneficial to listen to what he wrote those many years ago.
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In good years in the market, it’s good enough to be average. Everyone makes money in the good years, and I have yet to hear anyone explain convincingly why it’s important to beat the market when the market does well. No, in the good years average is good enough.
There is a time, however, when we consider it essential to beat the market, and that’s in the bad years. Our clients don’t expect to bear the full brunt of market losses when they occur, and neither do we.
Thus, it’s our goal to do as well as the market when it does well and better than the market when it does poorly. At first blush that may sound like a modest goal, but it’s really quite ambitious.
In order to stay up with the market when it does well, a portfolio has to incorporate good measures of beta and correlation with the market. But if we’re aided by beta and correlation on the way up, shouldn’t they be expected to hurt us on the way down?
If we’re consistently able to decline less when the market declines and also participate fully when the market rises, this can be attributable to only one thing: alpha, or skill.
That’s an example of value-added investing, and if demonstrated over a period of decades, it has to come from investment skill. Asymmetry— better performance on the upside than on the downside relative to what your style alone would produce—should be every investor’s goal.
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Howard Marks,
The Most Important Thing
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