Market Commentary: Billionaire Investment Memo Secrets Revealed
Howard Marks is the billionaire founder of Oaktree Capital, which oversees $164 billion. Last we looked his net worth eclipsed $2.2 billion. That kind of wealth isn’t accumulated by accident. So what’s his formula for success?
We jumped down the rabbit hole to explore what secrets lay within his investment memos and here is a list that could be helpful in building enormous wealth over the long-term.
Key Points
- Howard Marks is a billionaire investor who has made a fortune by understanding market psychology and cycles.
- He advocates that investors understand how human patterns repeat cyclically and how excesses and corrections are inevitable.
- He emphasizes that most of the time, the consensus is right, and that it is important to distinguish between a narrative and a sentiment extreme.
Know Thyself, and Others
The old biblical advice to know thyself is advocated by Marks. He suggests that investors understand psychology because human patterns repeat cyclically.
If you know how people react to periods of euphoria and depression, you can get a better glimpse of historical patterns and how they rhyme over time so when sentiment reaches extreme levels, you can sell the greed or buy the fear more confidently.
Excesses & Corrections
One market analyst famously observed that, in the East, it is known that everything cycles. Marks advocates that investors internalize this concept by trusting that a strong movement in one direction will, sooner or later, lead to a strong movement in the opposing direction. When you apply that logic to the markets, you will realize that no trend will last forever.
Investors get caught up in frenzies when stocks power higher week after week, month after month. Their rational selves are left in the dust as their emotions get caught up in the furore of a soaring or crashing market. By knowing that the trend will reverse, you are less likely to be caught up in the wave that will soon crash.
Things Can Only Get Worse
“When the herd’s thinking is Pollyannaish or apocalyptic, the odds increase that the current price level is unsustainable”
Do you remember the goldilocks period promoted on financial networks in 2007? A future of perpetual growth was promoted right before the market melted down.
Similarly, at the lows in 2009, no possibility for a return to the good old days could be fathomed. Be wary of narratives and remember that the probability of a trend continuing diminishes when sentiment reaches extremes.
Most Of The Time, The Consensus Is Right
“To be successful at contrarianism, you have to understand what the herd is doing, why it’s doing it, what’s wrong with it, and what should be done instead and why”
It’s important to distinguish between a narrative and and a sentiment extreme. Just because a stock is reaching all-time highs doesn’t mean you should bet against it. The narrative might be that the stock is overpriced but it could be perfectly justified and could occur without the market hitting a sentiment fever pitch. For the most part, riding the trend with the majority is the smarter and more lucrative bet.
To be very successful you need to distinguish between higher highs, lower lows, and sentiment extremes. They are not always one and the same. Certainly, a sentiment extreme will occur at a high and a low, but a high and low doesn’t always accompany a sentiment extreme.
