Howard Marks – Ditto

Howard Marks’ letters are always a treasure trove of good investment advice; his latest letter is especially good ( Howard Marks – “Ditto” ).  If you like this letter, or are at all interested in investing (particularly value investing) you should read his book The Most Important Thing.  

A few highlights:

• Investor psychology is perhaps the biggest driver of security price fluctuations (the underlying fundamentals generally don’t change THAT much, THAT fast
• Over the years, I’ve become convinced that fluctuations in investor attitudes toward risk contribute more to major market movements than anything else.  I don’t expect this to ever change.
• Much (perhaps most) of the risk in investing comes not from the companies, institutions or securities involved.  It comes from the behavior of investors.
• Good assets can deliver poor returns and poor assets can deliver superior returns – it’s not the asset quality that determines investment risk.  The bottom line on this is simple.  No asset is so good that it can’t be bid up to the point where it’s overpriced and thus dangerous.  And few assets are so bad that they can’t become underpriced and thus safe (not to mention potentially lucrative)
• The price of an asset is the principal determinant of its riskiness”.  Since participants set security prices, it’s their behavior that creates most of the risk in investing.
• Becoming more and less risk averse at the right time is a great way to enhance investment performance.  Doing it at the wrong time – like most people do – can have a terrible effect on results
• In bad times securities can often be bought at prices that understate their merits.  And ing good times securities can be sold at prices that overstate their potential.  And yet, most people are impelled to buy euphorically when the cycle drives prices up and to sell in panic when it drives prices down
• To be a successful contrarian, you have to be able to:
  •  see what most people are doing
  • understand what’s wrong about most people’s behavior
  • possess a strong sense for intrinsic value, which most people ignore at the extremes
  • resist the psychological pressures that make most people err, and thus
  • buy when most people are selling and sell when most people are buying

 

This is just the tip of the iceberg, if you find this interesting it’s worth your time to read the entire letter.