A Dozen Things I’ve Learned About Investing from Howard Marks

1. “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”  Psychological mistakes are at the same time the biggest source of danger for an investor and the biggest source of opportunity when other people succumb to those mistakes.  If you can keep your head about you when everyone else is losing theirs, you can profit in ways which beat the market. Howard Marks: “The absolute best buying opportunities come when asset holders are forced to sell.”
2.  “Rule No. 1:  Most things will prove to be cyclical. – Rule No. 2:  Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.” Nothing good or bad goes on forever.  And yet people extrapolate sometimes as if a phenomenon will go on indefinitely. “If something cannot go on forever it will eventually stop” famously said Herbert Stein. Situations in which mean reversion does not happen are rare enough as to make a mean reversion assumption a consistent friend to the investor.
3.  “We don’t know what lies ahead in terms of the macro future. Few people if any know more than the consensus about what’s going to happen to the economy, interest rates and market aggregates. Thus, the investor’s time is better spent trying to gain a knowledge advantage regarding ‘the knowable’: industries, companies and securities. The more micro your focus, the great the likelihood you can learn things others don’t.”  Focusing on the simplest possible system (an individual company) is the greatest opportunity for an investor since a company is understandable in a way which may reveal a mispriced bet. Howard Marks puts it simply:  “We don’t make macro bets.”
4.  “We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.”  This video has excellent material from Marks on why trying to make macroeconomic predictions is bound to fail:   https://www.youtube.com/watch?v=2It1fzcBoJU  If great investors like Marks, Buffett, Munger, Lynch etc. can’t make macro forecasts, do you think economists can? If you do believe they can, “Where are the economists’ yachts?”  Howard Marks notes that anyone can be right “once in a row” especially when the range of possible outcomes is small.
5.  “There are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third; you have to be right.”  Being a contrarian for its own sake is suicidal. Not being a contrarian at all means by definition you can’t outperform the market. Being genuinely contrarian means you are going to be uncomfortable sometimes. Howard Marks adds:  “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.”
6. “It is our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling – and if our view turns out to be right – that’s the route to the greatest rewards earned with the least risk.”  By focusing in the mathematics associated with value investing you are in a better position to shut out psychological dysfunction.  Value investing is like meditation and the intrinsic value calculation is the mantra.
7.  “The future does not exist. It’s only a range of possibilities. We have to understand that most outcomes will be determined by luck.”  *Every* great investor in this “Dozen Things” series of blog posts thinks in terms of expected value. There are no exceptions. Howard Marks: “The expected value from any activity is the product of the gains available from doing it right multiplied by the probability of doing it right, minus the potential cost of failing in the attempt multiplied by the probability of failing.”
8.  “Leverage magnifies outcomes, but doesn’t add value.” Leverage magnifies results whether good or bad.  “Volatility + leverage = dynamite.”  It is wise to always have a Margin of Safety.
9. “You can’t predict.  You can prepare.” Some aspects of life have an unknown probability distribution and some potential future states are unknown.  One can deal with this by being anti-fragile and having a margins of safety.  Will doubling your money make you twice as happy?  Would you really like to take the change that you might need to “return to go” and start over?
10.  “In both economic forecasting and investment management, it’s worth noting that there’s usually someone who gets it exactly right… but it’s rarely the same person twice. The most successful investors get things ‘about right’ most of the time, and that’s much better than the rest.”  The poseur in the magazine or on the deck of a big yacht is often lucky rather than good.  Don’t confuse luck with skill and work as if you need to be skillful rather than lucky. In reviewing Mauboussin’s book “The Success Equation Marks wrote:  “in fields where luck plays a big part, like investing, outcomes are of limited relevance in assessing performance.”
11. “The great investors are the people who have made a lot of investments over a long period of time and made a lot of money, and their results show that it wasn’t a fluke — that they did it consistently.”  Persistent success is strong evidence of skill rather than luck generating a given set of results.
12.  “I keep going back to what Charlie Munger said to me, which is none of this is easy, and anybody who thinks it is easy is stupid. It is just not easy. There are many layers to this, and you just have to think well.” If you are not willing to do the work or feel like you have the wrong emotional temperament, buy low fee index funds.  Dumb money becomes smart once it accepts its limitations.

source: https://25iq.com/2013/07/30/a-dozen-things-ive-learned-about-investing-from-howard-marks/

Longboard Funds – What Are We Diversifying, Anyway?

Go back to the basics to successfully diversify your portfolio
You could probably outperform 90% of investors today by following two platitudes we’ve all known since childhood:

1. Don’t put all your eggs in one basket
2. Buy low and sell high

This seems simple enough, but with Dalbar’s research showing that investors destroy 60% of their portfolio’s performance with emotional decisions, this advice is harder to follow than we might believe.
But why?

Diversifying

Don’t put all of your eggs in one basket

The basket is an investment and the eggs are your capital. The lesson is simple: put your capital into multiple investment baskets.
Most people interpret this as: diversify your return sources to increase your chances of profit. However, smart investors know it’s much more fruitful to diversify risk sources, which reduces your chances of loss.
It’s as important to split up your eggs into multiple baskets as it is for those baskets to have different functions. Since downsides are inevitable, having a variety of baskets to hold your eggs sets you up for the highest likelihood of success.
A bully might come along and step on one of your wicker baskets. But if your other one is made of reinforced steel, he won’t make a dent in it. If you’re properly diversified, one force usually won’t affect all styles of investing the same way. So, it’s not too daunting to recover from your loss. You put more eggs in your depleted basket as income comes in, and soon you’re back to where you started. In this manner, diversification can be a long-term profit center—your overall portfolio recovers more quickly because your drawdown was isolated to one area.

However, if all your eggs are in wicker baskets – taking the same types of risk – a bully on a full-fledged stomping rampage can take down a lot of your egg stockpile…and fast. The investors who focus on diversifying performance rather than risk can easily fall prey to this rampage and will experience much more pain during downsides, including larger maximum drawdowns.
But putting eggs in different baskets is only half the solution.

Buy low and sell high

A simple concept in theory, this is much harder to follow in practice. In most other parts of life, you easily follow this advice. You haggle on the price of a new luxury automobile. You ruthlessly negotiate the price of that new home in the best neighborhood.
But for some reason with investments, investors tend to crowd in at all-time highs, then consider themselves the unluckiest of investors when the market hits an inevitable down cycle.
The two main emotions driving this are greed and fear.
Greed causes investors to chase performance: buying what was up the most recently (buying high) and selling things that are not working and declining (selling low).
Fear of losing money further aggravates this, because when your entire portfolio is in decline the natural reaction is to get scared and sell everything (selling low). Investors often intend to buy back in when things calm down (most likely when prices are back up – again, buying high).
Rebalancing each year is one way to skirt this behavior.
Checking in on your portfolio too often is like tracking the ups and downs of the housing market day to day. Investors will be unnecessarily worried about short-term performance over long-term value. But, for most investors, harvesting investments once each year to balance the risk in their portfolio helps reduce that risk. When greed and fear inevitably rear their ugly heads, investors who rebalance annually are much less likely to cause long term damage to their portfolio.
Diversifying your baskets and rebalancing your risk are intrinsic investing behaviors. But the more complex the investment, the easier these basic principles are to forget. That’s why going back to the basics is most important for investments that reside in an investor’s alternatives sleeve.

source: http://www.valuewalk.com/2017/01/longboard-funds-diversifying-anyway/

Dan Ariely’s decision-making tip: Understanding our minds

Duke University professor Dan Ariely has built a career mapping the peculiarities of our innermost decision-making foibles, and offers insight in guarding against them.

Each of us makes hundreds of decisions every day. Most of them are small: Should I buy that shirt? Do I have five more minutes to spend playing my favourite app? Others demand more thought: How should I plan my retirement savings? Is marriage right for me? The common thread running between a lot of them is that we are, in some sense, unequipped to make sense of any of it. The world in which the human race came of age—one of ferocious predators and unforgiving nature—is no longer the world we live in. For the risks we face now, we are out of date.

Dan Ariely, James B. Duke Professor of Psychology and Behavioral Economics at Duke University, has built a career mapping the peculiarities of our innermost decision-making foibles, and offers insight in guarding against them. Edited excerpts from an interview:

Why are human beings hardwired to be predictably irrational?

There’s a few potential answers for this, but here is one general idea. If you think about it, we were designed with a computation machine, a brain, to deal with all kinds of things… to deal with jungles and different types of risks. And the machinery that we got did not have to be perfect, but it had to be very accurate. For example, if you see a tiger, you want to run away very, very quickly. You don’t want to stop and think about it. And if it’s not a real tiger, you still want to run away; why take the risk?
[But] now the world has changed on us. We don’t have many tigers, sadly actually, anymore. And now we deal with all kinds of other things, we deal with something like money. Very long term, we have to think, we have to plan. We have to deal with things like traffic. I mean, just think about the range of things that we deal with. They are very different from the things we evolved to deal with, and now we use our brain mechanism to deal with those things, but it’s very far from perfect. So, we make mistakes. We are basically trying to use the machinery that is not used to solving problems about healthcare and money and long-term relationships and mortgages. And we try to use them and we make mistakes.

How does decision-making vary across different places and different cultures?

Think about visual illusions. Visual illusions are basically the same the world over. If you can see, you have a visual illusion. It’s something very basic in terms of how our brains work. Now, when we come to decision-making, there is some very basic decision-making. For example, what happens when we are stressed, or what happens when we have too many options, or what happens when we have the default, and in those cases people don’t seem to be too different from each other.
But, cultures do matter, because cultures can take up a domain and say, “In this domain, we care about X, Y or Z.” So, some cultures can say, “You know what? We care a lot about how you portray yourself to other people.” Or some cultures can come and say, “We care a lot about how you stand in line” or something. Or some culture could come along and say, “We care a lot about the value of friendship.” Whatever it is, cultures don’t change the backbone of humanity, but they do change the way we view particular types of activities, kind of silos.

How might insights into our hardwired flaws and the way to guard against them apply to business decisions? Can a CEO make use of it?

Of course, [we can apply it here]. There are lots of ways in which we are rational. You can think about what motivates employees. Is it just salary? Is it gifts? Is it kind words? Lots of things motivate us. If you understand what things actually motivate people, rational, irrational, you can motivate people to a higher degree. If you understand what kinds of products people will be excited about, you can create those. So, lots of things in the business domain as well.

The world seems to be moving faster and faster. Does that translate to a greater urgency to pay attention to the way we make decisions?

Yes, absolutely. So, partially it is these days we have more temptations, right? So, that’s very important to realize. There’s more things around us to tempt us. Partially we make more decisions without thinking. We are on the mobile device, thinking, making decisions on the go. We are also more stressed and have less time to consider all options. So, I think, irrationality is on the rise. Temptation is on the rise, and the consequences and the opportunities for us to make mistakes are higher.

Your book The Honest Truth about Dishonesty described an experiment in which a fake student was planted among students taking a real exam. The plant, openly cheating on the exam, induced other students to cheat. Can this sort of thing happen on a larger scale? Say, if a CEO, or a top political leader is perceived to be dishonest?

Yes. What we find is that dishonesty is socially infectious. And if somebody in high power, let’s say, a CEO, or an executive, or a movie star or somebody like this, cheats in an egregious way, people would look at it and change what they view as acceptable and not acceptable.

Seeing as that is true, how do you go about fixing this problem once it has taken root in a large organization?

I actually think that this is something that is very interesting about China. So, in China, there have been attempts with the new government to reset things. So, they say, “No more waste… we are not going to waste, we are not going to pile things on our plate and eat too much,” and “no more corruption”. It’s not that corruption stops, or that waste stops, but you basically… to stop this slippery slope in that direction, you need to say, “Here is how we are going to act from now on” and basically make sure that everybody acts in that new way, and announce: “From now on, we are going to do things differently,” and that’s a very important direction.
Read an unabridged version of the interview on www.foundingfuel.com, published in an exclusive partnership with knowledge.ckgsb.edu.cn/

source: livemint.com
http://www.livemint.com/Companies/c1T7AJoV3h5OgO5soV0nIJ/Dan-Arielys-decisionmaking-tip-Understanding-our-minds.html