This is taken from a presentation by Howard Marks Co-Founder of Oaktree Capital. This is the third article in a series. Mr. Marks makes concise and incisive comments about the art of investing that can help amateur and professional investors alike.
You have to think in a way that departs from the consensus; you have to think differently and better. The price of a security at a given point in time reflects the consensus of investors regarding its value. The big gains arise when the consensus turns out to have underestimated reality. To be able to take advantage of such divergences, you have to think in a way that departs from the consensus; you have to think differently and better. Any time you think you know something others don’t, you should examine the basis for that belief. Ask Questions like- “Does everyone know that?” or “Why should I be privy to exceptional information or insight?”
It isn’t the inability to see the future that cripples most efforts at investment. More often it’s emotion. Investors swing like a pendulum – between greed and fear, euphoria and depression, credulousness and skepticism, and risk tolerance and risk aversion. Usually, they swing in the wrong direction, warming to things after they rise and shunning them after they fall. Technology now enables them to become distracted by returns daily. Thus, one way to gain an advantage is by ignoring the noise created by the manic swings of others and focusing on the things that matter in the long term.
To be a successful investor, you have to have a philosophy and process you believe in and can stick to, even under pressure.
Since no approach will allow you to profit from all types of opportunities or in all environments, you have to be willing to not participate in everything that goes up, only the things that fit your approach. To be a disciplined investor, you have to be able to stand by and watch as other people make money in things you passed on. Every investment approach – even if skillfully applied – will run into environments for which it is ill-suited. That means even the best of investors will have periods of poor performance. Even if you’re correct in identifying a divergence of popular opinion from eventual reality, it can take a long time for the price to converge with value, and it can require something that serves as a catalyst. To be able to stick with an approach or decision until it proves out, investors have to be able to weather periods when the results are embarrassing.
Source- Truth’s about investing by Howard Marks
Asset Multiplier Comments:
- Investors with a longer time horizon are less likely to make emotional judgments. A properly allocated portfolio has the appropriate mix of equity and fixed-income asset classes to provide an investor with the highest chance of success. This means retiring comfortably without running out of money.
- A sound investment philosophy is founded on a thorough knowledge of markets. Determine the return you require, the income you will need for your retirement expenses, and the degree of portfolio appreciation you need to achieve that. Selecting a plan and adhering to it is also part of your investment philosophy. Passive investing might just be your investment philosophy.
- Adhering to your philosophy entails avoiding emotion-driven buy-and-sell choices and sticking to your intended allocation regardless of market movements. The whole objective of allocating according to a strategy is to prevent hopping in and out of assets on the spur of the moment.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”