Just after the dot-com bubble burst in 1999, Howard Marks (Trades, Portfolio) wrote his impressions on where the market would go and what were the most rational steps an investor could follow. It is important to note that Marks never mentioned where the market would go, just that the eternal truths of investing would become critical to navigate through uncertainty.
What I like about Marks' comments is that generally they are rational and provide calm for investors in times of high volatility.
Also, Marks generally utilizes second-level thinking, which makes us re-think our theses several times. I wish I could put the author's remarks in simpler words; however, I believe that this brief summary correctly reflects the soul of the eternal truths.
"Beware of generalizations: Most of the time, and especially at the extremes, markets over-generalize. Last year, investors acted as if all of the telecom companies would succeed; this year, investors seem to think they're all losers. When the market “throws the baby out with the bathwater,” as we believe it’s doing now, gems can often be found among the wreckage.
Respect cycles: There's little I'm certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don't grow to the sky. Few things go to zero.
Worry about time: Another element that investors ignore in their optimism is time. It seems obvious, but long-term trends need time in order to work out, and time can be limited. Or as John Maynard Keynes put it, "Markets can remain irrational longer than you can remain solvent."
Remember that, for the most part, things don't change: The five most dangerous words in our business aren't "The check's in the mail" but "This time it'll be different." Most bubbles proceed from the belief that something has changed permanently. It may be a technological advance, a shortage or a new fad, but what all three have in common is that they're usually short-lived.
Never forget valuation: The focus may shift from dividend yield to p/e ratio, and people may stop looking at book value, but that doesn't mean valuation is irrelevant.
Be conscious of investor psychology: I don't believe in the ability of forecasts or forecasters to tell us where prices are going, but I think an understanding of investor psychology can give us a hint.
Check your own mindset: For me, mindset holds many of the keys to success. We at Oaktree believe strongly in contrarianism. Closely related to contrarianism is skepticism. It’s a simple concept, but it has great potential for keeping us out of trouble. We think humility is essential, especially concerning the ability to know the future. Finally, we believe in investing defensively. That means worrying about what we may not know, and about what can go wrong, and about losing money. If you’re worried, you’ll tend to build in more margin for error. Worriers make less when everything goes right, but they also lose less – and stay in the game – when things return to earth."
What do you think?
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