Quote for the Week
I divide investors into two schools: The “I know” school and the “I don’t know” school. For my first 20 years in business in what I would call the institutional establishment, I ran into the “I know” school most of the time. These are people who will tell you exactly what is going to go on one, three, five, or 10 years from now in the economy, in the markets, in interest rates, which economies will do best, which industries, and which stocks. They tend to invest on the assumption that they are right. Then when they turn out to be wrong, they try to correct their mistakes and invest on the next set of scenarios rather than acknowledging that perhaps rightly there are limitations on their foreknowledge.
The “I know” school invests for one outcome, economy, market, interest rates, industry, and company. They concentrate their portfolios given that they know what the future holds. They lever heavily, and they target maximum price gains.
Most of the outstanding investors that I have known over the years belong to the “I don’t know” school with regard to the macro environment. They may know companies and securities better than anybody else in the world, but with regard to the macro they assume that they don’t know what the future holds. So they hedge against uncertainty. They diversify. They avoid or limit leverage, and they emphasize the avoidance of losses rather than – or I would say as least as important as – the acquisition of gains.
When most people think about the future, they ignore that the future is a distribution of possibilities. If you are a student, and you know what is more likely than something else, you might think about the future as a distribution of probabilities if you can wisely assign probability. But it is a range of events that could happen. Most people – especially in the “I know” school – think in terms of the average or the norm, and think that the thing they think is most likely to happen will happen and they ignore the outliers. — Howard Marks (source)
From the Archives
Last Call
- Optimism Among Gamblers & Investors? – B. Ritholtz
- What Worked for Fund Investors? Pinching Pennies and Letting Winners Run – J. Ptak
- When Index Funds Make the Market Riskier – Klement on Investing
- Charley Ellis: Why Most Investors Fail (And What to Do Instead) (podcast) – Long Term Investor
- Do Households Have a Good Sense of Their Long-Term Care Risks? – CRR
- Macro Myths: 18 Misconceptions About the Great Recession – Pursuit of Happiness
- Defense Against Dishonest Charts – Flowing Data
- Artificial Intelligence and Stability – VoxEU
- My Quest to Find the Owner of a Mysterious WWII Japanese Sword – Outside
- Scientists Say They’ve Found the Perfect Way to Boil an Egg – Smithsonian