Monday, 27 February 2017

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 6

Finding bargains
• Investment is the discipline of relative selection
• Our goal isn't to find good assets, but good buys. Thus, it's not what you buy; it's what you pay for it.   
• The necessary condition for the existence of bargains is that perception has to be considerably worse than reality.

Ultimately, we are all looking to make money from stocks. So, even though HUL is a great business, it is unlikely to make to really wealthy. A good business is not always a good stock and vice versa.

Patient Opportunism
• Sometimes we maximize contribution by being discerning and relatively inactive. Patient opportunism - waiting for bargains - is often your best strategy.

Patience and being emotionally able to sit tight on a position or with cash is critical, although one of the toughest things to do. This is where the right investing temperament is required. As Jesse Livermore said famously and is also oft repeated by Charlie Munger, "Throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting."

Having a sense of where we stand
• Most people strive to adjust their portfolios based in what they think lies ahead. At the same time, however, most people would admit forward visibility just isn't that great. That's why I make the case for responding to the current realities and their implications, as opposed to expecting the future to be made clear.

Move beyond "hope trades" to discerning what is going on in the markets today and calibrate your actions based on that.

Investing defensively
• If we avoid the losers, the winners will take care of themselves.
• Investing scared, requiring good value and a substantial margin for error, and being conscious of what you don't knowand can't control are hallmarks of the best investors I know.
• Worry about the possibility of loss. Worry that there's something you don't know. Worry that you can make high quality decisions but still be hit by bad luck or surprise events. Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing goes wrong, surely the winners will take care of themselves.
Avoiding Pitfalls
• The success of your investment actions shouldn't be highly dependent on normal outcomes prevailing; instead , you must allow for outliers.
• Loss of confidence and resolve can cause investors to sell at the bottom, converting downward fluctuations into permanent losses and preventing them from participating fully in the subsequent recovery.
Shit happens. Be prepared, atleast mentally to deal with it. Don't put all your eggs in one basket no matter how good and insulated the basket is!!

Reasonable Expectations
 • Investment expectations must be reasonable. Anything else will get you into trouble, usually through the acceptance of greater risk that is perceived.

Don't try to overreach. Having an unreal and unjustified return expectation is the beginning to investment mistakes. Don't pick a return (like 25% or 30% or 40%) out of thin air and hope to make that every year. It will necessarily make you do things which will eventually lead you to losses.

This concludes the learning and musings from Howard marks' The Most Important Thing Illuminated.

You can read the previous posts in order:
Part 1
Part 2
Part 3
Part 4
Part 5
Part 6

Sunday, 26 February 2017

Building the Right Investment Temperament - Excerpts from Howard Marks - Part 5

Being attentive to cycles
• Just about everything is cyclical. Cycles always prevail eventually. Nothing goes in one direction forever.

Awareness of the pendulum
• There are a few things of which we can be sure, and this is one: extreme market behaviour will reverse. Those who believe that the pendulum will move in one direction forever - or reside at an extreme forever - will eventually lose huge sums. Those who understand the pendulum's behaviour can benefit enormously.
This is one of my core beliefs. In sports, we call this by "law of averages" or "rub of the green". Mean reversion works, but in some cases, you may need to have a suitable long term time frame to judge its impact.
Combating negative influences
• Many people will reach similar cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently. The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.
• From time to time greed drives investors to throw in their lot with the crowd in pursuit of profit, and eventually they pay the price. We must constantly be on the lookout for things that can't work in real life. In short, the process of investing requires a strong dose of disbelief. Inadequate skepticism contributes to investment losses.

Again, something very very core to my belief system. Temperament is what differentiates the good investor from the bad. And the ability to say "No" to things or stories that don't make sense regardless of who is saying it.
• You must do things not just because they are the opposite of what the crowd is doing, but because you know why the crowd is wrong.
• Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortable idiosyncratic portfolios, which frequently appear imprudent in the eyes of conventional wisdom.
• Only a skeptic can separate the things that sound good and are from the things that sound good and aren't. The best investors I know exemplify this trait. Skepticism and pessimism aren't synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.

Taking a view that is different from the majority is a psychologically difficult thing to do. But the best results are obtained by people who are able to stand apart from the crowd.

Weekly Reading: Some interesting stuff

Robert Schiller on a possible US bear market - The US stock market today looks a lot like it did at the peaks before most of the country’s...