Howard Marks’ memos

20170110 expert-opinion

20160526 economic-reality.pdf

20160119 what-does-the-market-know

  • Here’s what I wrote in “It’s Not Easy” in September and included in “On the Couch”:  Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead.  
  • I based the above reference to Ben Graham on his famous observation that in the long run the market’s a weighing machine, but in the short run it’s a voting machine.
  • So, what does the market know? First it’s important to understand for this purpose that there really isn’t such a thing as “the market.” There’s just a bunch of people who participate in a market. The market isn’t more than the sum of the participants, and it doesn’t “know” any more than their collective knowledge.
  • The thinking of the crowd isn’t synergistic. In my view, the investment IQ of the market isn’t any higher than the average IQ of the participants.
  • the market price merely reflects the average insight of the market participants.
  • If anything, I think it’s emotion that’s synergistic. It builds into herd behavior or mass hysteria.
  • A Case in Point – The Crash of 2008
  • A Case in Point – Senior Loans in the Financial Crisis
  • Why would senior debt fall more during a crisis than junior debt? The answer is that senior loans had been ground zero for buying with leverage (and thus for margin calls and forced selling) whereas high yield bonds had not.
  • What do big price declines mean? They mean market participants sense fundamental deterioration. But what price declines say is reflective, not predictive. They tell you about the events that have occurred, and how investors have reacted to them. They don’t tell you anything that the average investor doesn’t know about future events. And, again, I’m firmly convinced (a) the average investor doesn’t know much, and (b) following average opinion won’t help you attain above average results. 
  • Last year Charlie Munger complained to me that they’re really “three-decision stocks”: you sell it because you think the price is full, you have to figure out when to buy it back, and in the meantime you have to come up with something else to do with your money. In my experience, most people who are lucky enough to sell something before it goes down get so busy patting themselves on the back that they forget to buy it back.
  • Most mature investors know intellectually that short-term price fluctuations are low in fundamental significance, and that the best results will be achieved if they hold on to their positions and ride out the volatility. But sometimes people sell anyway, perhaps for the above reasons. Doing so has the potential to convert a short-term fluctuation into a permanent loss by causing any subsequent recovery to be missed. I consider this the cardinal sin in investing. 
  • I want to end by making one thing completely clear. I’m not saying the market is never right when prices go down (or up). I’m merely saying the market has no special insight and conveys no consistently helpful message. It’s not that it’s always wrong; it’s that there’s no reason to presume it’s right.