Howard Marks: Elevated popular opinion

“…most investors think quality, as opposed to price, is the determinant of whether something’s risky. But high quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them. . . . Elevated popular opinion, then, isn’t just the source of low return potential, but also of high risk.”

–Howard Marks.

Howard Marks: Negatives accumulate

One of the most notable behavioral traits among investors is their tendency to overlook negatives or understate their significance for a while, and then eventually to capitulate and overreact to them on the downside.  I attribute a lot of this to psychological failings and the rest to the inability to appreciate the true significance of events. As negatives accumulate – whether they surface for the first time or just are finally recognized as significant – eventually a time comes when they can no longer be ignored, and instead they come to be treated as being of overwhelming importance.”

—-Howard Marks.

Howard Marks: Cyclicality

“The basic reason for the cyclicality in our world is the involvement of humans. Mechanical things can go in a straight line. Time moves ahead continuously. So can a machine when it’s adequately powered. But processes in fields like history and economics involve people, and when people are involved, the results are variable and cyclical.”
—Howard Marks.

Howard Marks: None of them ‘know’

“The vast majority of today’s negative-yield bonds are in Europe and Japan. One of the biggest questions surrounds whether negative rates will reach the U.S. This question takes me back to my immediate response to Ian’s suggestion that I write this memo: nobody knows, and certainly not me. When something hasn’t happened in the past, it’s impossible to be sure you know how it’ll end up. Different people will express opinions on this subject with differing degrees of confidence. Yet I remain certain that none of them ‘know.'” –Howard Marks.

Howard Marks: Uncertainty

“I’m firmly convinced that markets will continue to rise and fall, and I think I know (a) why and (b) what makes these movements more or less imminent. But I’m sure I’ll never know when they’re going to turn up or down, how far they’ll go after they do, how fast they’ll move, when they’ll turn back toward the midpoint, or how far they’ll continue on the opposite side. So there’s a great deal to admit uncertainty about.” —Howard Marks.

Howard Marks: Thankful heart

“The philosopher Cicero said something beautiful. He said, ‘The thankful heart is not only the greatest of all the virtues, but it is the parent of all the other virtues.’ And I think what that means is that people who are lucky should thank their luck, acknowledge it and revel in it. I think it will also make them want to share the fruits of their luck with others.” –Howard Marks. 

Howard Marks: Endemic to all markets

“We don’t consider ourselves good macro-forecasters (or even people who believe in forecasting). So we certainly are in no position to say when the recession or market pullback will start, how bad it will be…or even that there definitely will be one. But we think we’re unlikely to be proved wrong if we say cyclicality is not at an end but rather is endemic to all markets, and that every up leg will be followed by a down leg.”

—Howard Marks. 

Howard Marks: Survive on the worst days

“Never forget about the man who was six-foot-tall, who drowned crossing the stream that was five feet deep on average. To be a successful investor, at minimum, you have to survive. Surviving on the good days is not the issue. You have to be able to survive on the bad days. The idea of surviving on average is not sufficient. You have to be able to survive on the worst days.” –Howard Marks. 

Howard Marks: Patterns

“This effort to explain life through the recognition of patterns—and thus to come up with winning formulas—is complicated, in large part, because we live in a world that is beset by randomness and in which people don’t behave the same from one instance to the next, even when they intend to. The realization that past events were largely affected by these things—and thus that future events aren’t fully predictable—is unpleasant, as it makes life less subject to anticipation, rule-making and rendering safe. Thus people search for explanations that would make events understandable . . . often to an extent beyond that which is appropriate. This is as true in investing as it is in other aspects of life.”

—Howard Marks, “Mastering the Market Cycle”. 

Howard Marks: Very, almost depressing

“There are three words which are among the most important words in our business: I don’t know. And if you don’t know something…you should admit it—to yourself and to everybody around you. And I think personally that it’s very freeing to say ‘I don’t know.’ I think it’s very, almost depressing, to feel that you have to have an opinion on every subject, even the ones where by definition you can’t have superior knowledge.”

—Howard Marks. 

Howard Marks: Are you prepared? 

“Controlling risk is the mark of a professional. Anybody can make money when the market goes up. And most of the time the market goes up. And anybody who takes above-average risk can do above average when the market rises. So achieving returns is not a point of distinction in good times. In my opinion, the distinction of a superior investor is achieving returns in good times with the risk under control, because you never know when the environment is going to shift from favorable to unfavorable. And the question is: are you prepared?”

—Howard Marks. 

Howard Marks: Judgment

“There can’t be a rule that always works…. These things cannot be reduced to a rule. The market operates so as to confound rule makers…. It all comes down to judgment. If we’re going to have superior investment performance we have to have superior judgment. You can work on your processes, both intellectually and emotionally, but superior judgment isn’t something you can order up. And not everybody can necessarily attain it. I think that one of the most important things is to dismiss the concept of a process or rule that always works in the absence of superior judgment.” —Howard Marks. 

Howard Marks: Something no one anticipated

“What could cause a market decline? A drop in investor confidence — perhaps the commodity that’s most freely available today — would likely be the key, but the reason is hard to foresee. We’re not expecting any surprises,’ people say, and that has become our new favorite oxymoron. Surprises are never expected — by definition — and yet they’re what move the market. (If they were expected, their effects would already be priced into the market, rendering a price reaction unnecessary.) The next surprise might be geo-political (oil embargo, war in Korea), economic (tight money, slowing profit growth) or internal to the market (competition from bonds at higher interest rates, discovery of a fraud), but it’s most likely to be something that no one has anticipated — including us.” – Howard Marks, September 1997 (“Are You An Investor or a Speculator?“).

Howard Marks: Overpermissive

“Overpermissive providers of capital frequently aid and abet financial bubbles. . . . In Field of Dreams, Kevin Costner was told, ‘if you build it, they will come.’ In the financial world, if you offer cheap money, they will borrow, buy and build – often without discipline, and with very negative consequences.” -Howard Marks (November 2001)

Howard Marks: Proceed carefully

The workings of free capital markets require that in order to overcome investors’ innate aversion to risk, seemingly riskier investments must offer the possibility of higher returns providing ‘risk premiums.’ But when risk aversion is at cyclical lows, risk premiums needn’t be generous; people will invest anyway. Too many people trying to dine at the buffet simultaneously can lead to a disorderly process and skimpy portions. I recommend that you look twice at the cost of admission and – if you do decide to partake – proceed carefully. “

—Howard Marks.