Delanceyplace: Superior Investing
Legendary investor Howard Marks contends that superior
investment results can only come from going against the consensus. However, just because an investment is contrarian does not make it a good investment, it has to be the right contrarian investment -- and contrarian investing is by definition a highly risky and lonely pursuit.
There's only one way to describe most investors: trend followers. Superior investors
are the exact opposite. Superior investing, as I hope I've convinced you by now,
requires ... a way of thinking that's different from that of others, more complex
and more insightful. By definition, most of the crowd can't share it. Thus, the
judgments of the crowd can't hold the key to success. Rather, the trend, the consensus
view, is something to game against, and the consensus portfolio is one to diverge
from. As the pendulum swings or the market goes through its cycles, the key to ultimate
success lies in doing the opposite. ...
The thing I find most interesting about investing is how paradoxical it is: how
often the things that seem most obvious -- on which everyone agrees -- turn out
not to be true.
What's clear to the broad consensus of investors is almost always wrong. ... The
very coalescing of popular opinion behind an investment tends to eliminate its profit
potential. ... Take, for example, the investment that 'everyone' believes to be
a great idea. In my view by definition it simply cannot be so.
* If everyone likes it, it's probably because it has been doing well. Most people
seem to think outstanding performance to date presages outstanding future performance.
Actually, it's more likely that outstanding performance to date has borrowed from
the future and thus presages subpar performance from here on out.
* If everyone likes it, it's likely the price has risen to reflect a level of adulation
from which relatively little further appreciation is likely.
* If everyone likes it, there's significant risk that prices will fall if the crowd
changes its collective mind and moves for the exit."Superior investors know-and
buy-when the price of something is lower than it should be. And the price of an
investment can be lower than it should be only when most people don't see its merit.
Yogi Berra is famous for having said, 'Nobody goes to that restaurant anymore; it's
too crowded.' It's just as nonsensical to say, 'Everyone realizes that investment's
a bargain.' If everyone realizes it, they'll buy, in which case the price will no
longer be low. ... Large amounts of money aren't made by buying what everybody likes.
They're made by buying what everybody underestimates. ..."In short, there are two
primary elements in superior investing:
* seeing some quality that others don't see or appreciate (and that isn't reflected
in the price), and
* having it turn out to be true (or at least accepted by the market).
It should
be clear from the first element that the process has to begin with investors who
are unusually perceptive, unconventional, iconoclastic or early. That's why successful
investors are said to spend a lot of their time being lonely.
Author: Howard Marks
Title: The Most Important Thing
Publisher: Columbia Business School
Date: Copyright 2011 by Columbia University Press
Pages: 91, 95-96
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