Investment Principles From Howard Marks: If you are seeking for somebody to look up to who are successful investor, you won’t have a hard time finding them. There are a lot of them. Then there is a more exclusive group of legendary investors, such as Warren Buffet, who have generated billions of dollars in profits not only for themselves but also for their shareholders. However, even legendary figures admit that they have mentors and other figures in their lives to whom they look up. One of these exceptionally unusual people is Howard Marks, an investor who is held in such high regard that legendary financiers like Warren Buffett look up to him.
Here are the top 8 essential investment principles from Howard Marks:
- Investment success doesn’t come from “buying good things,” but rather from “buying things well.” (Emphasis on rigorous research and due diligence)
- Compounding investing wisdom: Continuous learning and refinement of investment principles are crucial for success.
- No rule works all the time: Markets are complex and influenced by numerous variables, making it essential to adapt and evolve investment strategies.
- Fear of looking wrong is a major pitfall: Investors must be willing to hold their views strongly, even in the face of temporary losses, and avoid emotional decisions.
- Proper valuation is key: A confident and accurate assessment of intrinsic value is essential for making informed investment decisions.
- Investing in declining markets requires:
- A view on intrinsic value
- Holding that view strongly enough to withstand price declines
- Being correct in one’s assessment
- Disciplined approach and commitment to sound principles are necessary for long-term investment success.
- Counter-cyclical and contrarian behavior can improve investment outcomes by allowing investors to capitalize on opportunities others may overlook.
These principles emphasize the importance of rigorous research, adaptability, emotional control, and a long-term perspective in investment decision-making.
A description of Howard Marks as the co-founder and co-chairman of Oaktree Capital Management would be the most straightforward method to introduce him to the audience. Howard Marks is an expert in locating assets that are distressed to invest in, and this organization manages assets worth more than US$160 billion. Under the leadership of Mr. Marks, Oaktree Capital Management has achieved a great deal of success, and it has provided its investors with long-term returns of 19 percent per annum after taking into account costs. Howard Marks is admired by other investors not just for his successful investing techniques but also for his “memos,” which offer a novel perspective on the economy as well as Howard Marks’s successful investing strategies. Therefore, it is worthwhile to make the effort to take a deeper look to pick up a few pointers to increase your ability to invest in the stock market.
Even seasoned investors have a lot to gain from Howard Marks and the financial tactics he employs, since they may teach them a lot. The first thing that novice investors should do is make sure they have the fundamentals down, and Howard Marks offers a straightforward recommendation on how to achieve this goal. In his own words, “The process of sensibly constructing a portfolio consists of buying the greatest investments, making a place for them by selling fewer ones, and staying clear of the worst,” which may be read as “buying the best investments, making room for them by selling lesser ones.” These sage comments should serve as a guiding principle for all those who are interested in investing.
In this article, we will examine ten of Howard Marks’ most important pieces of advice regarding the stock market, which were culled from his memos and his widely acclaimed book, “The Most Important Thing: Uncommon Sense for the Thoughtful Investor.
1. Always Be Aware of the Dangers Involved in an Investment
In contrast to the conventional wisdom, Mr. Marks does connect risk with the degree to which an investment’s value can fluctuate. The possibility that an investor will end up losing all of the primary amount invested is what Howard Marks regards to be the definition of risk. According to him, the most effective strategy for lowering risk is to concentrate one’s efforts on minimizing financial losses. The decision to take no risks at all is one strategy to minimize financial loss; nevertheless, doing so may result in much lower returns.
Therefore, the other option is to exercise control over the degree of risk. Several strategies for mitigating the dangers associated with financial investments have been proposed by Mr. Marks, including the following:
Investments spread out across several different asset groups to reduce risk
Regular re-equilibration of the investment portfolio
Acquiring and retaining an awareness of one’s risk tolerance
Making investments with an eye toward the future
Investing by particular objectives
Managing all of this on your own might be difficult; therefore, the most prudent course of action would be to opt to execute your investments using an ET Money Genius subscription. Genius is an intelligent investing framework that gives you the ability to create personalized investment strategies and portfolios. This allows you to maximize your returns consistently while simultaneously lowering volatility and ensuring enough protection against the loss of value.
2. The importance of luck should not be discounted in any way.
If lady luck is on your side, you may occasionally achieve success even though the odds are stacked against you. An experienced investor would understand that the end outcome was the consequence of pure luck, even though such triumphs could make you appear to be a visionary. Howard Marks has acknowledged, in one of his memoranda, both the significance of luck and the fact that even the most skilled investors may, on occasion, be unsuccessful merely because luck was not on their side. Both of these points are true.
In addition to this, he has emphasized that to be a good investor, one must have a certain amount of luck and that it is extremely unlikely that one will always be correct. On the other hand, Mr. Marks says that investors can enhance their “luck” by taking certain activities to better their portfolios. These kinds of activities include looking for investment possibilities in markets that are sound on their fundamentals but aren’t particularly popular right now. An additional choice is to look for investment possibilities in unusual scenarios, which might arise from one-time occurrences such as post-bankruptcy reorganizations, CEO changes, spin-offs, and other similar occurrences.
3. Recognize that you are unable to see into the future.
Even the most intelligent individual in the world can’t possibly know everything there is to know. Because of this, Howard Marks has reiterated again and over again the significance of maintaining intellectual humility. Investors can lower the risk of making errors caused by overconfidence by first acknowledging the boundaries of their expertise and then working to overcome those boundaries.
Since it is difficult to know what the future will bring, Mr. Marks merely recommends that investors concentrate exclusively on the aspects of their investments that are under their control. For instance, while it is impossible to say for definite whether a fresh wave of COVID will occur in the near or medium future, one does have the option right now of deciding whether to invest aggressively or conservatively, depending on the convictions that one holds.
Now that the decision has been made, investors can select suitable investments across important asset classes such as equity, debt, gold, and so on to build a diversified portfolio. No matter what the future holds for the market, proper asset allocation and diversification can help investors optimize their profits while simultaneously lowering their overall risk. Therefore, rather than attempting to forecast what will happen in the future, you should concentrate on the aspects of the present that are within your power to influence to ensure that you are adequately prepared for any future scenarios.
4. Get a firm grasp of the significance of different market cycles.
Howard Marks is a firm believer in market cycles and their power to regulate different areas of investing, including anything from investor emotions to collapses in the stock market. In particular, Howard Marks is convinced that market cycles will continue to govern investing. In the book he titled “Mastering the Market Cycle,” he presented the following two guidelines regarding market cycles:
Rule 1: The majority of things will have a cycle.
The second rule of investing is that the best possibilities will present themselves when other investors ignore the first rule.
The fact that, in general, investors tend to overvalue equities when times are good and undervalue the same businesses when times are terrible is the best example that can be given to demonstrate this point. As a direct consequence of this, investors experience swings between states of elation and sadness. Successful investors understand that these are temporary phases that present unrivaled opportunities for the generation of wealth over the long run.
5. Be familiar with the three most important responsibilities that lead to successful investing.
Howard Marks famously observed that despite the common perception that investing is straightforward, the activity itself is not simple. He went on to say that to become a good investor, one must consistently and successfully carry out the following three fundamental tasks:
Put in the effort to learn as much as you can about the companies and industries in which you wish to invest.
Learn to master your feelings so you can make judgments based on logic.
Carry yourself in a manner that is both counter-cyclical and contrarian.
Even while it’s possible that completing these three activities over and over again won’t ensure investment success, doing so can unquestionably boost a person’s chances of being a successful investor over the long term.
6. When deciding on investments, take a contrarian stance.
Herd mentality is one of the most common causes of poor investment choices, which is one of the most significant errors an investor can make. Because of this, Howard Marks says that for investors to obtain higher returns from their investments, they need to differentiate themselves from the herd. The following are some examples of how this can be accomplished:
selecting companies that are not closely watched by market analysts
Investigating investments that aren’t very well known, have fallen out of favor, or are undervalued
Taking into consideration investments that could be contentious.
Choosing investments that are centered on addressing unique circumstances
Investing in areas of the economy that are struggling
Despite the undeniable benefits associated with such unconventional ways of thinking, putting such ideas into action can be a challenge. Going against the grain is not only difficult in the best of circumstances, but it also requires you to put in substantial work to investigate the assets you are considering.
Being a contrarian only for the sake of being a contrarian is not the way to become a great investor. This is the more significant point. In addition to this, you need to make certain that you select the appropriate assets by utilizing the contrarian strategy.
7. Make sure you have a significant cushion for error.
The margin of safety is one of the most important aspects of value investing, which centers on selecting investments with market prices that are lower than the investments’ intrinsic values. Benjamin Graham is widely regarded as the “father of value investing,” and it was in his book “The Intelligent Investor” that he first emphasized this important takeaway, which is now considered one of his most important lessons.
The term “margin of safety” refers to the gap that exists between the true or fundamental value of a company and the purchase price that an investor is willing to pay for that company. Therefore, the disparity between the investment’s actual value and its price on the market is proportional to the size of the margin of safety that has been built in. The primary advantage that comes with having a larger margin of safety is that it lowers the overall risk that is taken on by the investor.
An additional suggestion made by Howard Marks is that for investors to select inexpensive stocks with the biggest margin of safety, they should go beyond the price of the stock and the financials of the firm. You also need to take into consideration several other aspects, including stability, the underlying predictability of the firm’s profitability, and the prognosis of the industry in which the company competes.
8. Be aware of the likelihood that you will sustain a loss.
The vast majority of investors are aware of the fact that losses are sometimes unavoidable in certain circumstances. However, Howard Marks urges potential investors to take their analysis a step further and take into account the likelihood that their investment would result in a loss. This is because various investments come with a variety of risk-reward ratios; thus, investors need to have a solid comprehension of how these ratios work together. Having a firm understanding of this relationship can assist create chances for investments that are one of a kind.
For instance, if a stock is perceived to have an excessively high level of risk, there will be a low demand for it, which will lead to a decrease in the price of the stock. If the decline is significant enough, it may be possible to expand the margin of safety to such a high degree that the risk associated with investing is significantly decreased. However, for investors to profit from such a scenario, they need to undertake their research and sketch out the potential good and negative outcomes as well as the probabilities that are linked with each outcome.