Investing is not easy
Thanks to a subscriber for this insightful note by Howard Marks at Oaktree which is well worth taking the time to read. It does a wonderful job of describing the siren call of a bull market to pay ever higher prices and an equally sound portrayal of how difficult it is to buy following a big sell-off. It is posted without further comment but here is a section:
The most outstanding characteristic of first-level thinkers – and of the investing herd – is that they like things with obvious appeal. These are the things that are easy to understand and easy to buy. But that’s unlikely to be the path to investment success. Here’s how I put it in “Everyone Knows” (April 2007):
What’s clear to the broad consensus of investors is almost always wrong.
First, most people don’t understand the process through which something comes to have outstanding moneymaking potential. And second, the very coalescing of popular opinion behind an investment tends to eliminate its profit potential.
Take, for example, the investment that “everyone” believes to be a great idea. In my view by definition it simply cannot be so.
If everyone likes it, it’s probably because it has been doing well. Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages sub-par performance from here on out.
If everyone likes it, it’s likely the price has risen to reflect a level of adulation from which relatively little further appreciation is likely. (Sure it’s possible for something to move from “overvalued” to “more overvalued,” but I wouldn’t want to count on it happening.)
If everyone likes it, it’s likely the area has been mined too thoroughly – and has seen too much capital flow in – for many bargains to remain.
If everyone likes it, there’s significant risk that prices will fall if the crowd changes its collective mind and moves for the exit.
Superior investors know – and buy – when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don’t see its merit. Yogi Berra is famous for having said, “Nobody goes to that restaurant anymore; it’s too crowded.” It’s just as nonsensical to say, “Everyone realizes that investment’s a bargain.” If everyone realizes it, they’ll have bought, in which case the price will no longer be low.
Here is a link to the full report.
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