Howard Marks has been on a tear with his memos lately. In the latest, out this week, he answers the important question, “Should I wait for the bottom?”
In short, the answer is no. Since bottoms are only found out after the fact, buying on the downswing offers more opportunities than the alternative — waiting for some “all clear” signal.
The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones. Think about your normal behavior. Before every purchase, do you insist on being sure the thing in question will never be available lower? That is, that you’re buying at the bottom? I doubt it. You probably buy because you think you’re getting a good asset at an attractive price. Isn’t that enough? And I trust you sell because you think the selling price is adequate or more, not becaue you’re convinced the price can never go higher. To insist on buying only at bottoms and selling only at tops would be paralyzing…
The bottom line for me is that I’m not at all troubled saying (a) markets may be considerably lower sometime in the coming months and (b) we’re buying today when we find good value. I don’t find these statements inconsistent.
With as fast as the market’ moved in the past two weeks, the question might be updated to: “Did I miss the bottom?”
Arguments can be made for both yes and no. The correct answer is it’s impossible to know today. Besides, not holding tight to opinions on this is more important than having one.
First-quarter earnings, over the next few weeks, will offer some insight into the impact. But the second-quarter numbers will tell the tale. The best-case scenario is we won’t find out the real hit to companies — revenues, earnings, etc. — until sometime in July, at the earliest.
Duration is still the biggest unanswered question right now. How long will it last? How will the market react to companies that report no revenues for a month? Two months? A quarter?
Investing is about understanding potential risks, placing bets based on those possibilities, but also being prepared for alternative outcomes.
That’s why investing is a tradeoff. Finding the perfect balance between offense and defense in your portfolio is never easy. But if you go all-in thinking the market bottomed in an attempt to not miss the recovery, and you’re wrong, then you lose. But if you’re all-out and wrong, you miss out on gains and also lose. Investment survival is a necessity. So finding a good enough balance, that you’re comfortable with, is key.
The only guarantee is that when all this blows over, everyone will wish they had more cash to invest, that they bought more stocks, and at a better time.
That’s the painful lesson with risk — not all risks are realized but we still need to prepare for it just in case.
Marks Memo: Calibrating (pdf)
- The Important Thing Is to Not Be Afraid – R. Holiday
- What Next? (Two Questions) – M. Housel
- What’s Priced In? – Verdad
- The Only Black Swans with William Bernstein (video) – The Compound
- Gavin Baker: Investing Through a Bear Market (podcast) – Invest Like the Best
- The State of Diversification is Worse than You Think – Klement on Investing
- A Letter to My Future Investing Self – ValIdea
- Unlikely Optimism: The Conjunctive Events Bias – Farnam Street
- The Virus Changed the Way We Internet – NY Times
- The Silence of Owls – Knowable Magazine