Importance of Experience, Criteria for Long Term Success, and Specialist v. Generalist
The correctness of a decision can’t be judged from the outcome. — Howard Marks
I recently came across three short videos featuring value investing super-star Howard Marks. Marks is the co-founder of Oaktree Capital Management and author of The Most Important Thing: Uncommon Sense for the Thoughtful Investor. Within the value investing community his “memos to Oaktree clients” are well-known, widely read, and quoted often. The videos may be a tad dated, but the advice is sound.
Importance of Experience. Marks says certain things go with youth, who after all haven’t had much experience with extreme cycles and how they can turn against you. Navigating the cycle requires a developed philosophy which can only come from experience. The beginning investor is typically disadvantaged by the lack of a fully-formed investment psychology and philosophy they can hold on to strongly because they just haven’t had the experience yet. Marks says it’s easier for him to be unemotional than it is for somebody just starting out who hasn’t been educated by the market over several decades. This makes investing an area where experience and age are a great advantage. He says most people are dying to quit working by 62, but in the investment industry, you see people who’d normally be considered ‘quite old’ still working. Marks is confident folks like Buffett and Icahn aren’t still doing it for the money even though most would consider them at the “top of their game”. He points out Kohlberg, Kravis and Roberts aren’t exactly kids and lots of “senior citizens” continue to work energetically in the investment field. It’s not an area where you get tired out. You can view his full comments here.
Criteria for Long Term Success. According to Marks, there’s certainly more than one way to skin a cat. People say you can’t repeatedly macro forecast successfully, or you can’t trade algorithms, yet Stan Druckenmiller and Renaissance are doing just that. Others have successfully traded commodities. Marks emphasizes the importance of risk controls and notes there are high-risk takers who have been successful. The key is a well thought-out approach built up over some years or decades. Marks holds strongly to the notion you have to be willing and able to hold through periods when your system isn’t working because nothing’s going to work in every market, or at every stage of the cycle; even year in and year out. He references the book, Hedge Hogs, which talks about some outstanding investors who’ve had terrible periods in the ‘dog house’. Marks says the more strongly you hold your approach means the more out of favor you’re going to be a certain times. It’s extremely important to have a well thought out, valid approach you’re committed to and can stay with for the long haul. The approach also needs to fit your personality. You can view his full comments here.
Specialist v. Generalist. Marks tell the story of being a young analyst and keeping a piece of paper from the Financial Times above his desk. It read along the lines of an analyst is someone who knows a great deal about a few things and learns more and more about less and less until he knows everything about nothing. The portfolio manager is someone who knows a little about a lot of things and learns less and less until he knows nothing about everything, and a client is someone who starts off knowing a reasonable amount about a fair number of things, but through association with the analyst and the portfolio manager learns a lesson less about more and more until he knows nothing about anything. He says the dilemma is you either want to know everything about a micro specialty, or a fair bit about a broad number of things, but it’s important to take whatever knowledge you have and understand the context of that knowledge isn’t limited to your area of specialization. We all have different ways of thinking about problems and learn or derive our conclusions based on our own analytical processes. Marks says it helps to understand history, to understand science, and he compares investing to the ‘last’ liberal art. Each disciplines lessons, whether psychology, philosophy, or physics, etc. can be carried over to the investment process. He doesn’t consider himself a specialist and says he reads fairly broadly because it does no good to know everything about one little thing if you don’t know how that one little thing fits in to the world. You can view his full comments here.