Howard Marks: The Great Investors Are Unemotional People

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Here’s a great excerpt from an interview that Howard Marks recently did with During the interview Marks talks about the psychological aspects that make successful investors great saying, “Most of the great investors I know are unemotional people”. Here’s an excerpt from the interview:

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What about psychological aspects? The higher asset prices go, the more difficult it gets to stay on the sideline.

The economic historian Charles Kindleberger said: “There’s nothing worse for your mental wellbeing than to watch a friend get rich.” It’s a great saying because it’s one of the strongest forces in the world. People do not buy a stock at $ 5 and they do not buy it at $ 10, $ 15, $ 30 or $ 40. But when it gets to $ 50 they say: “Shoot, I can not stand the pressure, I have to go in.” The point is, everybody wants to get rich. And everybody wants to find a way to get rich which does not entail risk. So people are optimistic for the simple reason that they want to get rich.

Oftentimes that’s when things end up in tears. How can you stay prudent and avoid short-term temptations in order to earn superior returns in the long-run?

Investing is a funny thing because a long-run is a series of short-runs. Yet, the long-run is a thing in itself: If you aim at pursue long-run performance then it does not work to try to accomplish superior short-run performance every year. The things you might do to try to be in the top decile in a given year increase your risk of being in the bottom decile. But if you just do it well, with no trips to the bottom or even to the bottom of the distribution, it will make you superior in the long-run. So trying to be superior in the long-run by presumption maximization in the short-run is the most reliable course.

In other words: Just striving to do better than average every year is the key to coming out on top in the long-run?

It’s a philosophical thing. Trying too hard in the short-run exposes you to the risk of doing badly. Trying to find big winners on every trade exposes you to the risk of having losers. You accomplish more by having these are modest but more reasonable. Put differently, trying to make a big home run hitter induces the possibility of strike-outs – and strike-outs have a very bad effect on your long-term performance. That’s why the investment business is full of people.

Then again, keeping a clear head when things get really exciting is easier said than done.

The major volatility of the market is the result of change in psychology: Good news makes people excited and buy. Bad news makes them depressed and sell. But if you get excited when things go well and depressed when things go badly you’ll buy high and sell low, and you are unlikely to have superior results. By definition, your reaction has to be different from that of others.

How do you do that?

There are only two ways: You can be an unemotional person who’s in charge of his or her psyche, or you can be an emotional person who can keep it under control. Most of the great investors I know are unemotional people. They are intellectual and analytical, solid and not volatile. In the great crash of 1907 for instance, JP Morgan walked out on the floor of the New York Stock Exchange and said, “I buy.” Another example is Warren Buffett’s $ 5 billion investment in Goldman Sachs during the financial crisis.

Oaktree, too, made some big and successful bets at the depths of the financial crisis. How do you remember these turbulent days?

As I recount in my recent book , in the fourth quarter of 2008, we spent more than half a billion dollars a week on average for fifteen weeks in a row. I could not say we were absolutely sure or we had no fear. We were uncertain and we did it with trepidation. But we did it anyway. So the essential question is: Do you feel control you? Or do you control them?

You can read the entire interview here – Howard Marks: Investors Are Willing To Do Everything –

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Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds®. The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.