Transcription
Most people get excited the better things go. They feel better about stocks the higher the prices. They tend to buy more when the prices are at high levels, and then when it turns down, they get depressed, and they get sad, and they rue the day they ever bought a stock, and they tend to sell at low prices. You must invest differently from the herd. You must invest idiosyncratically. Idiosyncratic positions are uncomfortable.
Ever identified an asset that was overpriced and got out, only to see it go down the next day? Overpriced assets become more overpriced, and you have to be able to live with that, and it's uncomfortable. You, you, you, you prompted me to think a little bit about your notion of being aggressive or defensive, uh, in different kinds of market situations. You, you talk about that as something you, that, that, that governs a lot of how. Could you explain a little bit?
Well, I, I really think that the most important single decision for what I call the medium term in investing is whether to be more aggressive or more defensive at a point in time. Now, I'm not talking about the short term, like the next day, week, or month, and I'm not talking about the long term, like 30 years, when you can ignore the interim fluctuations. I'm talking about two, three, five years. If you're positioning your portfolio today for the next three years, I think the most important question is whether it should be an aggressive portfolio or a defensive portfolio. And it's not stocks versus bonds, high quality versus low quality, growth stocks versus value stocks, US stocks versus foreign stocks, uh, developed world stocks versus emerging stocks, large companies versus small. The most important question is offense or defense. If you have an aggressive portfolio in a period when the offense was called for, you'll get chewed up, and it doesn't matter how you answered all those other questions. And if you have an aggressive portfolio at a time when it turns out that aggressiveness was propitious, it doesn't matter how you answer those questions either; you'll be successful. So I really believe that that's the key. Let me talk about it in another direction now.
I believe that every investor, myself included, every day faces two risks. I call them the twin risks. What are they? The first one is obvious; it's the risk of losing money. The second one is a little more subtle; it's the risk of missing opportunities. And we have to confront these every day. Now, if you say to me, "I want to be absolutely sure that I don't lose any money," then I'll, I'll say, "Okay, we'll put you all in T-bills. You can't lose any money, but you miss every opportunity." If you say, "I want to be 100% sure I don't miss any of the opportunities," then I say, "Okay, no T-bills for you. We'll put you all in risk assets, and you will be 100% exposed to the risk of losing money." So you can eliminate one, but it puts you firmly in the crosshairs of the other, or you can compromise on the two. And most people, what do they say? Well, "I don't want, you know, I, uh, uh, I don't want to lose any money, but on the other hand, I don't want to miss all the opportunities, so I'm going to do some of each. I'm going to balance aggressiveness and defensiveness. I'm going to balance worrying about avoiding losing money and worrying about missing opportunities." And that's the right thing to do. All one or all the other makes absolutely no sense. Okay, manage the two risks, balance them. In what proportion? That's the next question.
So the way I think about this proposition: so in July of '17, I wrote a memo advising some caution, and some guy on TV says, "That's it, Howard Marks says it's time to get out." And when I, when I ran into him the next time, I said, "There's only two things I would never say: 'get out' and 'it's time,' because I don't, I am never that certain." And the investment world does not permit that level of uncertainty. It's not black or white. And when you go on, on, on the TV shows, as I do sometimes, they want you to say buy or sell, in or out, but it's not black or white; it's a, it's how you balance. And the way I think about it is there's a speedometer, like on the dashboard of your car, and it goes from zero to 100. And zero is all cash, and 100 is fully invested in risky securities and perhaps using margin or leverage. And the question is, where should you be in between? Now, if you want to invest—and most people say, "I want to make some money, so I'm going to invest"—and they, they try to think about whether they should buy Apple or Amazon, but they missed the step, the first step that everybody who considers investing should take is to say, "From zero to 100, who am I, given my age, my financial position, my income, my requirements, my dependence, my psyche? Where should I normally be?" If you're young, if you have a great career ahead, if you're making more money than you need, if you have no dependents, and you have—and if you make a mistake in investing, you have decades more to make it right—right, then you can be an 80 or a 90. If you're approaching retirement and you have a dependent spouse and you're not going to be earning your income anymore from your job, and if you are concerned about your ability to live with the, the emotional impact of fluctuations, then you might be a 30. So every person should perform serious introspection and figure out where they should be. And the emotional content is extremely important because the one thing you can't do in investing is you can't do the right thing if, if, if you can't stand the pain. And everything that happens emotionally conspires to make us make mistakes.
Most people get excited the better things go. They feel better about stocks the higher the prices. They tend to buy more when the prices are at high levels, and then when it turns down, they get depressed, and they get sad, and they rue the day they ever bought a stock, and they tend to sell at low prices. That's what most people do. How can we tell that that's what most people do? Because stocks go up, and when they get too high, then they come down, and most people are buying up here; that's what puts them up here, and they're selling down here; that's what puts them down here. So emotion works to our destruction. You must figure out whether you can live with the emotional ups and downs, and if you can't, you know, there are things you can do. You can turn your money over to other people to manage; you can, there are ways to put your investing on autopilot, anyway. Background. So you, there's a speedometer; it goes from zero to 100. Each one in the audience should figure out normally where they should be. And let's say I conclude that I'm a 75. Next question: Where should I be today? Should my portfolio be riskier than my normal portfolio because I think there are great times ahead, and prices are low, and psychology is depressed, and I think it's a propitious time to add risk? Or should I have less risk than normal because I think prices are high and optimism is everywhere, and euphoria, and, uh, uh, and the pendulum of psychology is probably going to swing back towards the midpoint? So I think it's extremely important to figure out where we are in the cycle and consequently where we should be positioning our portfolio riskwise relative to our normal position.
Well, that sounds like a lot of discipline, Howard.
To well, you ask most people to do. I mean, they want to follow the herd, don't they?
Well, they want to follow the herd, but the herd is usually wrong.
Yeah, and in investing, there's something called contrarian behavior, and all the great investors are, by definition, contrarian. In order to have a great investment result, what do you have to do? You have to buy when everybody else is selling and prices are low. You have to get out when everybody's buying and prices are high. You have to avoid the things that everybody loves and has bid up, and you have to buy the things that everybody hates and have permitted to drop like a stone. You have to do the opposite, but it's not easy. Be and Dave Swenson, who runs the endowment at Yale, which is, I think, the best performing endowment in the country over the last 30, 3 years that he's been there, has a, says in his book that superior investing requires the adoption of uncomfortably idiosyncratic positions. And those two words are fabulous because if you want to be a superior investor, even if you want to avoid these horrible mistakes that I describe, by definition, you must invest differently from the herd. You must invest idiosyncratically. But by definition, idiosyncratic positions are uncomfortable. Why? Because the market's going like this: every stock is getting more valuable every day. You say it's overpriced; you get out; it continues higher; everybody else is making money, telling you what an idiot you are to get out. And you know, there's a book about bubbles and crashes by Charles Kindleberger; he says there is nothing worse for your, for your equilibrium than to watch a friend get rich. That's human nature. And so, and, and, and by the way, so you get out of something. Nobody ever identified an asset that was overpriced and got out only to see it go down the next day. Overpriced assets—general rule—overpriced assets become more overpriced, and you have to be able to live with that, and it's uncomfortable. And there's an old saying in our business that being too far ahead of your time is indistinguishable from being wrong, but you have to live with that because there is no alternative.