When it comes to putting together a coherent investment philosophy, there is nothing better than experience. Sure, studying history and learning from other investors can be useful, but there really is no substitute for just doing the thing, particularly when the going gets tough. In his book, "The Most Important Thing," value investor Howard Marks (Trades, Portfolio) explains this concept.
Where does an investment philosophy come from?
For Marks, the crucial thing to understand is that there is no out-of-the-box investment strategy that will work for everyone, and no one goes through life with their philosophy unchanged:
“The one thing I’m sure of is that no one arrives on the doorstep of an investment career with his or her philosophy fully formed. A philosophy has to be the sum of many ideas accumulated over a long period of time from a variety of sources. One cannot develop an effective philosophy without having been exposed to life’s lessons. In my life I’ve been quite fortunate in terms of both rich experiences and powerful lessons.”
Marks does credit his time at both the Wharton and University of Chicago Business Schools as being formative of his investment approach. But the most valuable education for him came from the mistakes that he made, and the difficult investing periods that he lived through:
“I like to say, “Experience is what you get when you didn’t get what you wanted.” Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk. The most valuable lessons are learned in tough times.
"In that sense, I’ve been 'fortunate' to have lived through some doozies: the Arab oil embargo, stagflation, Nifty Fifty stock collapse and 'death of equities' of the 1970s; Black Monday in 1987, when the Dow Jones Industrial Index lost 22.6 percent of its value in one day; the 1994 spike in interest rates that put rate-sensitive debt in- struments into freefall; the emerging market crisis, Russian default and meltdown of Long-Term Capital Management in 1998; the bursting of thetech-stock bubble in 2000–2001; the accounting scandals of 2001–2002; and the worldwide financial crisis of 2007–2008,"
He learned some of the most valuable lessons in the seventies, when hiring in the money management industry was particularly sparse. By the time the late nineties had rolled around, there were few people left who had seen protracted bear markets. But Marks had. This knowledge gave him an edge over the rest of the field when it came to risk management, as the first-hand experience of living through a rough period made him a more prudent investor. No one likes to live through tough times. But once they are over, you will find that you are grateful for them.
Disclosure: The author owns no stocks mentioned.
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