Howard Marks (Trades, Portfolio) is no stranger to uncertainty. As an expert in the realm of distressed debt, he is willing to invest in some pretty risky businesses. He also believes, though, that investors are taking on unnecessary risk right now. In an April 24 interview with The Market, Marks spoke at length on the subject, cautioning others against taking unnecessarily aggressive steps.
No choice but to take risk
Marks does not believe investors are accurately assessing the level of risk in the markets today. Rather, he thinks investors feel they have no choice but to pursue increasingly riskier strategies and asset classes. This has depleted the pool of opportunities available:
“As an investor, you make the most money when you do things that other people aren’t willing to do, like taking risks others shun. Attractive investment opportunities arise when you spot some security or some part of the market being ignored and you come to the conclusion that it’s languishing cheap. But today, I don’t think anything is being ignored. Investors are willing to do almost everything.”
One of the main reasons why investors feel compelled to take these risks is the fear of missing out. This is a pretty common psychological factor, which causes people to buy high and sell low:
“The economic historian Charles Kindleberger said it best: 'There is nothing worse for your mental wellbeing than to watch a friend get rich.' It’s a great saying because envy is one of the strongest forces in the world. People don’t buy a stock at $5 and they don’t buy it at $10, $15, $30 or $40. But when it gets to $50 they say: 'Shoot, I can’t 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 doesn’t entail risk. So people are optimistic for the simple reason that they want to get rich.”
Of course, this is not rational behavior. But the pressure to get involved has sucked in many over the decades, and we have no reason to believe this time around will be any different.
The long run is not a collection of short runs
A lot of this excessive risk-seeking comes as a result of investors chasing short-term outperformance. Even those who can control their emotions and not be affected by the fear of missing out may still feel compelled to seek out unnecessarily risky asset classes because they want to post consistent returns for their portfolio.
“Investing is a funny thing because a lot of people think that the long-run is a series of short-runs. Yet, the long-run is a thing in itself: If you aim to pursue superior long-run performance then it doesn’t 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 do just consistently well, with no trips to the bottom decile or even to the bottom half of the distribution, it will make you superior in the long-run. So trying to be superior in the long-run by foregoing maximization in the short-run is the most reliable course.”
In other words, be more concerned about avoiding major losses than trying to always be in the top decile. In the long run, it will serve you well.
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