Investing Behaviour

Notes from Howard Marks’ Lecture: 48 Most Important Things I Learned on Investing

“If you were to read just five books in your life to become a sensible investor,” I often suggest people seeking my view, “…they have to be Warren Buffett’s letters, Poor Charlie’s Almanack, Peter Lynch’s One Up on Wall Street, Ben Graham’s The Intelligent Investor, and Howard Marks’ memos.”

Well, if you don’t know who Howard Marks is, let me tell you he is the CEO of Oaktree Capital and is one of the most famous investors who manages to keep a low profile, despite managing almost US$ 100 billion. Marks is also the author of an amazing book – The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In its ultimate praise, Warren Buffett writes, “This is that rarity, a useful book”.

I have been reading and re-reading Marks’ memos for a few years now, so was very fortunate to attend a lecture he gave in Mumbai yesterday titled – The Truth About Investing.

It was an enlightening session, just to be in the presence of this legend and hear him out live.

I made some notes from Marks’ lecture, which I present below (most of these are direct quotes from Marks). He calls these lessons as the “brutal truths” of investing. As you would realize while reading the notes, these indeed are brutal truths – stuff that is easier said than done.

Investing is Simple, but Not Easy

“Life is really simple, but we insist on making it complicated.” ~ Confucius

“Simplicity is a great virtue but it requires hard work to achieve it and education to appreciate it. And to make matters worse: complexity sells better.” ~ Edsger W. Dijkstra

It’s a sad fact of life that great people rarely divulge deep insights into how they achieved their greatness. And the sadder fact of life is that when a few of the greats do divulge the secrets of their greatness, we ignore them because the secrets often are too simple, too pedestrian, for us to appreciate.

“Huh! That’s it? It can’t be so simple!” we would say when we hear a great shelling out simple advice to achieve greatness.

Like, if you are learning martial arts and you hear Bruce Lee speak out the secret to his greatness – “Absorb what is useful, discard what is not, add what is uniquely your own” – you say, “Great thought, but is that it? It cannot be so simple!”

Consider investing. When we read Warren Buffett revealing that the only two rules of successful investing are – Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1 – our brain protests, “Great thought, but is that it? It cannot be so simple!”

Investing is simple, like Buffett also says, but not easy. Take a simple idea, Charlie Munger suggests, but take it seriously.

One Idea That Could Change Your Life (and How You Invest)

“Good morning, Sir,” I called out to a man walking just ahead of me during my morning walk yesterday. Like me, he was a regular at the walking track and we often crossed each other exchanging smiles and wishes. I had heard good things about him from others, and so I thought of engaging him in an interaction.

“How are you doing today?” I asked him.

“Great, as always!” he replied with a smile of a ten-year old. He, by the way, looked ninety years of age but healthy enough to be walking at quick pace.

“I have been observing you for the past many days,” I said, “And you always wear a nice smile on your face and look so healthy. It seems you are living a great life.”

“Yeah, it’s always been wonderful,” he replied, “No regrets at all.”

“That’s wonderful!” I said, “But you’ve been lucky,” I murmured, which he could hear, “Else life is so full of adversities and regrets.”

“Yeah, that’s true,” he replied. “It’s adversity all the way, but that’s what life is supposed to be, isn’t it?”

“Maybe, but then that’s not a life you seem to have lived, right?” I asked. “I can see that you are happy and healthy at ninety years of age, and I know that you are financially free. In other words, you seem to have everything that is missing for most of us going through mid-life.”

My Notes on a Brilliant Investment Letter I Just Read

One contemporary value investor I’ve learned a lot from, and look forward to read, is John Huber. John is the portfolio manager of Saber Capital Management, LLC, an investment firm that employs value investing strategy with the primary goal of patiently compounding capital for the long-term. He also writes about investing at Base Hit Investing.

I had interviewed John for the May 2016 issue of our Value Investing Almanack newsletter, and he was very generous in sharing his insights from his long experience as a value investor. Last week, I came across his 2016 letter to clients of Saber Capital, and was hooked instantly.

In this letter, John has shared some of the simplest yet profound thoughts on the practice of successful value investing. Despite their profundity, these thoughts have been forgotten and often ignored by investors who have seen their attention spans and investment horizons getting shorter and shorter.

Investing and the Paradox of Perfection

A lot of people I meet in the startup world and in investing are aiming for that perfect start when all their stars will align to take them off to the moon.

So, some keep waiting for their “best product” or “best design” before starting up their businesses, and others wait for the “perfect business to invest in” or “perfect price to invest at” before starting to invest their money.

The reason? They don’t want to be criticized for any mistake – like not getting business, or temporarily losing money in the stock market – they may make due to not being perfect at the start.

If you think about why we feel the need to be perfect in the first place, it all goes back to how we think about ourselves and our self-worth. If we have a strong desire to be perfect, then we may use the idea of perfection as a way to validate ourselves as worthy and valuable human beings.

Investing and Fear of Missing Out

We conducted our Value Investing Workshop in Ahmedabad yesterday, and here are the tribe members…

Let’s get to today’s post…

“You know I saved 50 rupees today,” declares the husband to his wife as he enters the house in the evening.

“And how did you do that?” the surprised wife asks.

“I missed the bus and ran behind it all the way from office to home.” The air of pride was palpable in the husband’s voice.

“Well, then you should have chased a taxi and saved 200 bucks!” the wife said. And her logic was spot on, wasn’t it?

Here is question for you – how much do you think the poor husband saved? Rs 50 or Rs 200? Extending the wife’s argument, the guy could have chased a Limousine and saved Rs 2,000. Do you see the absurdity of the logic?

Investing Lessons I Learned from Tic-Tac-Toe

If you have sat in a classroom dragging your feet through an uninteresting lecture, you must be familiar with the game of tic-tac-toe, also known as noughts and crosses or Xs and Os.

The game’s simplicity lies in fact that it takes not more than a minute to learn it and it can be played anywhere. All you need is a piece of paper, a pen/pencil and some time to kill. Like chess, it needs two players, but some people don’t mind it playing alone by taking turns and becoming their own opponent.

When I was a kid I even had a water bottle which had the grid of tic-tac-toe built on one of its side and plastic pieces (crosses and circles) to play.

In case, you’ve forgotten how the game is played, here’s a crash course to refresh your memory. A 3X3 grid is drawn on the paper and each player chooses their mark i.e. X or 0. The player who succeeds in placing three of their marks in a horizontal, vertical, or diagonal row wins the game.

When In Doubt, Please Don’t Predict

A leading Indian brokerage – let’s not take names here – is in the limelight these days for being consistent in revising its Sensex targets at the drop of a hat. In fact, it has been consistent in such revisions for almost the past two years. But the real beauty of all this lies in the fact that experts from this brokerage have no qualms about ditching their existing Sensex target to adopt the new one.

Just a month ago, its Head of Research appeared on CNBC and advised people to “take the market’s exit opportunity with both hands,” as he predicted “the Sensex is likely to touch 22,000 mark by the end of this year (March 2017).” He reiterated this target on 31st May.

Then, just a week later, he did a complete u-turn and raised the Sensex target to 29,500, again by the end of March 2017. On a lighter note, I suspect some superstition in this new target because unlike the earlier rounded-off targets of 36,000 (January 2015), 34,000 (March 2015), 32,000 (May 2015), 28,000 (August 2015), and 22,000 (March 2016), the new target is 29,500 (midway between 29,000 and 30,000). 😉

When Long-Term Thinking is a Terrible Idea

During my evening walk yesterday, I was with a 75-year old gentleman who seemed fitter than I am, walked faster than me, had a wider smile than I can ever manage, and talked much more than I do in a few days.

During the ninety minutes we walked together, we talked about our lives, careers, and investing.

“What do you do for a living, young man?” he asked me.

“I am a blogger and an investor,” I replied.

“What kind of an investor are you?” he asked back.

“Well, a long term investor in the stock market,” I said.

“Long term? Great! Even I have been a long term investor all my life,” he told me. “Long term investing makes a lot of sense.”

“Yeah it does,” I said. “Having a long-term thinking is always good.”

“Well, not always, son!” he replied.

“Why do you say so?” I asked.

Admission Open: Safal Niveshak Academy of Stock Market Failure

“We learn wisdom from failure much more than from success. We often discover what will do, by finding out what will not do; and probably he who never made a mistake never made a discovery.” ~ Samuel Smiles

“Fools say that they learn by experience. I prefer to profit by others experience.” ~ Otto von Bismarck

If, like me…

You hold a PhD or post-graduation in making mistakes in the stock market – as an investor / trader / speculator
Some of your teachers in the stock market have had the following surnames – Mr. Blunder, Ms. Mistake, Mr. Error, Ms. Fault, Sir Omission, Mr. Hit and Miss, Ms. Oversight, Mr. Slip, Ms. Trip, Mr. Stumble, Ms. Mess, Mr. Misfortune, Mr. Downfall, Mr. Bite the Dust, and Mr. Lose Your Shirt.

…I welcome you to join the Safal Niveshak Academy of Stock Market Failure.

The idea of this Academy is to bring together all those who have attained graduation or PhD in making mistakes in the stock market (and I am one of those), so that…

We learn vicariously from the stock market mistakes others have indulged in and we haven’t (as yet)
We confess the blunders we have committed so that others may know what they must avoid