The process of remaining successful in the market is not static. Those who have become successful (and not just in the share market) rarely stop learning new things. Constant reflection on new and old information is necessary to remain at the highest level. As I was turning my attention to the subject of today’s blog I came across a previous letter published by Howard Marks to clients of his investment firm Oaktree Capital. You can find a copy of the letter here.
For anyone not familiar with the name, he is simply put one of the greatest investors of our time – right up there with Warren Buffet and his long term partner Charlie Munger (albeit nowhere near as well known).
Be warned that the letter runs to some 14 pages but taking the time to read it (and re-read it if necessary) could be the best 15 minutes you’ll ever spend as far as the future of your investments is concerned. That’s a very big call on my part but his letter contains some universal investment truths that anyone considering investing their money in any asset class (whether it be in shares, property or anything else) needs to be aware of. I would go so far as to say that if you cannot read and understand the contents of this letter (and I mean really understand it) then you have no business investing your own money on an unassisted basis. If you show this letter to your financial advisor, financial planner, stock broker or accountant and they cannot understand it (or they don’t agree with it) then I’d strongly suggest that you start looking for a new advisor.
The letter contains too many great quotes to list all of them here (nearly all of them are highlighted bold in the letter itself) so let’s instead focus on some of the messages (in no particular order):
- Investing isn’t easy and anyone who thinks otherwise is simply naïve (probably because they are yet to have a bad experience) – at the right time in the cycle, making money in the share market (and other asset classes too) seems like the easiest thing in the world. You buy a bunch of stocks (and any stocks will do) and they go up and you make money and you wonder why you haven’t been doing this all along given how easy it is. You decide to take out a margin loan, you perhaps even quit your job so that you can focus on trading full time. You extrapolate all of your returns well into the future and buy a second home (a weekender in a coastal location) and a better car. This may have happened to you already or it may have happened to somebody else you know. If you have avoided this fate thus far then when the time comes DON’T DO IT! Investing is hard. Sometimes it seems easy but that’s just because something bad hasn’t happened yet. Buying tech stocks in the late 90’s seemed that way (and does again now to some extent) and at various times between then and now so too has buying biotech shares, oil stocks, gold stocks, emerging market shares (including China), the shares of Australia’s big 4 banks and so on. When everyone is talking about it and doing it, it’s generally already too late. I’m no expert on property but my guess is that the same thing could be said of the Sydney property market right now. Time will tell.
- Don’t underestimate the impact that investor psychology (including your own) has on asset prices – for very long periods of time, assets may not trade/change hands at anything approaching their true value. Value is of course a relative concept but at some point if the price of an asset falls far enough it will be cheap (irrespective of how poor the quality of the asset may be) and likewise if the price of an asset appreciates by enough then at some point it will be expensive (irrespective of how great its quality). The trick for most people is to avoid selling when prices are too low and to avoid buying when prices are too high. Even better (as we all know) is if you can buy when prices are too low and sell when they are too high. The problem is figuring out when prices are too high and too low and then acting accordingly. At times of extreme optimism it often seems as if the price of an asset will never come down and at times of extreme pessimism that they will never go up. Of course, we know that neither is true but it’s harder to convince ourselves of that at the time. One of Warren Buffet’s great strengths (and that of all great long term investors) is their ability to ignore short term ‘noise’. Unfortunately, there are very few of us can say the same. Many people who think they are long term investors become decidedly less so when markets are in free fall.
- If you’re intending to make superior profits (ie returns that are better than average) then you’d better be bringing something to the table that the ‘average’ investor is not – I am constantly amazed by the number of investors who believe that a few hours a week (if that) and a well-funded brokerage account is a sure fire recipe for investment success. In the market, all investors big and small are competing with professional investors for whom investing is a full time job and even that understates their true commitment. For the best traders and investors in the world, investing (or trading) is an all-consuming passion often bordering on an obsession. A full working week for them is not 35-40 hours but more like 60-80 hours. They often have cutting edge computer technology, teams of staff and access to privileged information courtesy of their vast professional networks. The average investor is no more likely to go toe to toe with one of these investors and come out in front than I am to beat Rory McIlroy over 18 holes of golf. I’m really lucky I may get the better of him on 1 or 2 holes but ‘luck’ really is the operative word and heaven help me if I should happen to confuse that with skill and decide to suggest a friendly wager between us on that basis.
For some people, the above (and Mr Marks letter) will be difficult to read. Some people will disagree and may actually be angry that I’ve written this. Some people will be sad because they know only too well what I’m talking about because they’ve had to learn these lessons the hard way. My motivation for writing this post is because I’m not sure how many more times I can speak to investors who have been sucked in by the latest fad (often peddled by lazy brokers, planners, seminar providers and so on) only to lose money (and sometimes a lot of it) because they never stopped to consider what could go wrong (often because they were never told).
Remember – it’s not supposed to be easy!