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10 Must-Know Investing Lessons From Howard Marks

If you are looking for role models who are successful investors, there is certainly no shortage of them. Then there’s a small group of legendary investors like Warren Buffet who have made billions of dollars not only for themselves but for their shareholders as well. But even legends acknowledge that they have role models and people they look up to. One of these rare figures is Howard Marx, who is admired even by veteran investors like Warren Buffett.

The easiest way would be to introduce Howard Marks, who is the co-founder and co-chairman of Oaktree Capital Management. The company manages more than US$160 billion in assets, and Howard Marks specializes in finding distressed assets to invest in. Oaktree Capital Management has been quite successful under the guidance of Mr. Marks And it has produced long-term returns for its investors after fees of 19% per annum. In addition to his investment success, Howard Marks is also admired by investors for his “memos” that provide unique insights into the economy and his successful investment strategies. So it’s definitely worth the effort to take a closer look so that you can take some tips to improve your investing skills.

In this blog, we will discuss 10 key investing lessons gathered from Howard Marx in his memo and his famous book – “The Most Important Thing: Uncommon Sense for the Thoughtful Investor”.

1. Accept that you don’t know the future

Even the smartest person cannot know everything. That’s why Howard Marx has repeatedly emphasized the importance of intellectual humility. By acknowledging the limits of their knowledge, investors can reduce the chances of mistakes arising from overconfidence.

Mr. Marks It only advises that it is impossible to predict what will happen in the future, instead investors will focus only on the things that are within their power. For example, while one cannot be sure whether a new wave of COVID will occur in the short or medium term, one can choose whether to invest aggressively or conservatively now based on their conviction.

Now based on that option, investors can choose suitable investments in major asset classes like Equity, Debt, Gold etc. To build a diversified portfolio. Asset allocation and diversification can help maximize returns while minimizing overall risk regardless of future market movements. So, instead of trying to predict the future, focus on what you can control in the present so that you are well prepared for all possible future outcomes.

2. Be a Contradiction When Choosing Investments

One of the biggest mistakes an investor can make is making investment decisions based on a herd mentality. That’s why Howard Marx suggests that investors need to differentiate themselves from the herd in order to get more returns from investments. Some ways to do this include:

  • Selecting stocks that are not followed by analysts
  • Investigating securities that are unpopular, out of favor or underappreciated
  • Considering investments that may be controversial
  • Choosing Investments That Focus on Specific Situations
  • investing in distressed areas

Despite the obvious merits of this kind of paradoxical thinking, such ideas can be difficult to put into practice. Apart from the fact that you have to put in significant effort to research such investments, going against the flow is challenging at even the best of times.

More importantly, just being averse to it is not the right way to be a successful investor. You also need to make sure that you choose the right investment by applying the opposite approach.

3. Make Sure You Have a High Margin of Safety

Margin of safety is a cornerstone of value investing that focuses on selecting investments whose market value is less than their intrinsic value. This is one of the key lessons of Benjamin Graham, the father of value investing, and was first mentioned in his book “The Intelligent Investor”.

Margin of safety is defined as the difference between the actual or fundamental value of a business and the price that the investor pays for it. Therefore, the larger the margin of safety, the greater the difference between the actual value of the investment and the market value. The main advantage of a higher margin of safety is that it reduces the overall risk for the investor.

Howard Marks further suggests that in order to pick the undervalued stocks with the highest margin of safety, investors should look beyond the company’s financial position and price. You also need to consider factors such as stability, the underlying prediction of a company’s earnings, as well as the outlook for that industry.

4. Learn to interpret company information correctly

The current information age has made it easier than ever to access a wide variety of information such as company financials, analyst reports, news, etc. But easy availability of information is also a challenge as everyone has access to the same information. This is why Howard Marks suggests that investors should try to gain a better understanding of the information they have. Some ways to do this include:

  • Getting a clear understanding of the business model
  • Getting information about the intangible assets held by the company
  • More clarity on changing consumer patterns
  • Ensuring better knowledge about the internal talent pool of the company
  • Have a better understanding of the potential impact of technological disruptions

Having an edge over other investors when evaluating potential investments can greatly improve an investor’s chances of becoming a successful investor. However, investors have to work relentlessly to stay ahead of the pack as almost all company information is easily available to anyone who wants it.

5. Always Know the Risks of an Investment

Contrary to popular belief, Mr. Marks equates risk with volatility of an investment. Howard Marx considers risk as the possibility that an investor may lose all of the principal amount invested. That’s why he believes the best way to reduce risk is to focus on avoiding losses. One way to avoid losses would be to take no risk, but this can result in significantly lower returns.

So, the alternative is to control the level of risk. Some of the methods suggested by Mr. Marks to control the risk associated with investments are:

  • Diversification of investments across multiple asset classes
  • Periodic rebalancing of portfolio
  • Understanding and maintaining risk tolerance
  • long term investment
  • Linking investments to specific goals

However, doing it all on your own can be challenging, so choose the smart way by executing your investments with an ET Money Genius membership. Genius is an intelligent investment framework that lets you choose customized investment strategies and portfolios so that you can consistently maximize your returns while minimizing volatility and ensuring adequate downside protection.

6. Know the Potential for Damage

Most investors understand that losses are inevitable in certain situations. But Howard Marks encourages investors to go ahead and consider the potential for negative results from their investments. This is because different investments have different risk-reward ratios, so investors should have a clear understanding of this relationship. Clearly understanding this relationship can help provide unique investment opportunities.

For example, if a stock is deemed too risky, it will find few buyers and result in a decrease in the price of the stock. If the drop is large enough, it can increase the margin of safety to such a high level that the risk of the investment is substantially reduced. But to benefit from such a scenario, investors need to do their homework and find out the possible positive/negative outcomes and the probabilities associated with each outcome.

7. Understand the Importance of Market Cycles

Howard Marx is a strong believer of his ability to control various aspects of investing ranging from market cycles and investor sentiment to stock market downturns. In his book “Mastering the Market Cycle”, he introduces 2 key rules about market cycles:

rule 1: most things will be cyclical

Rule 2: The best investment opportunities emerge when other investors forget the first rule.

This is best illustrated by the fact that ordinary investors tend to overvalue a stock when it is doing well and undervalue similar stocks during tough times. As a result, investors see alternate periods of euphoria and depression. Successful investors realize that these are fleeting phases that provide unmatched opportunities for long-term wealth creation.

8. Understand the impact of individual behavior and prejudices

Investing errors can often be caused by the individual behavior and biases of the investor. These days there is easy access to information like analysts’ views on stocks, making it even more difficult to make unbiased investment decisions. While easy access to multiple perspectives can be a good thing, personal bias can lead investors to make the wrong decisions.

In part, this is because markets typically operate in a cycle of greed and pessimism, depending on whether current conditions are favorable or unfavourable. Therefore investors should remember those instances where their behavior or bias led them to make the wrong decision. This can serve as a reminder so that they don’t end up repeating their past mistake.

9. Don’t underestimate the role of luck

Sometimes, you can win against all odds just because your luck was on your side. While such a win may sound like a visionary to you, a seasoned investor will recognize that the end result was just pure luck. In one of his memoirs, Howard Marx acknowledged the importance of luck and the fact that sometimes even the best investors may fail to succeed because luck was not on their side.

He has also emphasized that some degree of luck is necessary to be a successful investor and it is practically impossible to be right every time. However, Mr Marks suggests that investors can take some steps to improve their investment “luck”. Such actions include looking for investment opportunities in locations that are fundamentally strong but are currently not favored. Another option may be to look for investment opportunities resulting from one-time events such as post-bankruptcy restructurings, CEO changes, spin-offs, etc.

10. Know 3 Essential Functions That Make Investors Successful

Howard Marx once remarked that even though investing is easy, it is actually not an easy task. He further added that to be a successful investor, there are 3 key things one must do well over and over again:

  • Read on to learn more about the companies and industries you want to invest in
  • Control emotions to make rational decisions
  • behave counter-cyclically and in reverse

Performing these 3 tasks well over and over again may not guarantee investment success, but can certainly improve your chances of becoming a successful investor over the long term.

ground level

Even experienced investors can learn a lot from Howard Marx and his investment strategies. For new investors, the first step is to get down to the basics and Howard Marks has a simple suggestion on how to do it. In his own words, “the process of building a portfolio wisely involves buying the best investments, making room for them by short selling, and staying away from the worst.” These wise words are certainly a motto that all investors should live by.

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