Opinion – From Grain to Grain: Howard Marks explains five attitudes that investors should avoid

In addition to being the author of excellent books, Howard Marks is one of the most highly regarded managers in the world. Marks is Co-Chairman of Oaktree, a manager that manages BRL 880 billion in third-party funds. Monthly, Marks writes articles that are followed by the entire market. Warren Buffett himself has already confessed to being a fan of these articles. The last one, published this November, was special. He comments on what in his view matters and what does not matter in investments.

Due to space restrictions, today, I’ll comment on what he thinks doesn’t matter and tomorrow I’ll write about what matters in his investments.

Marks lists five attitudes that investors should avoid or not get carried away with when analyzing their investments:
1 – Short-term events;
2 – Mentality of trading🇧🇷
3 – Short-term performance;
4 – Focus on volatility;
5 – High activity of trading🇧🇷

These five points are what he describes as the least relevant in investing, but which investors often pursue the most.

When he says that short term events don’t matter he explains about the illusion of knowledge.

When we look back into the past, we can explain the reason for every market move. This gives us an illusion that we can predict the future and the behavior of assets to events.

The author points out that the movement of assets reflects the surprise in relation to expectations. Therefore, it would not be enough to know what will happen and whether what will happen will be good or bad. What matters is how different the realization is from the expectation.

To illustrate the mindset of trading what investors should avoid, Marks cites a story told by his father.

The story describes the dialogue between two people where one bought a can of sardines for $10,000. The owner of the can explains the reasons for the price. But when asked if he would eat the sardines, he says no, because they are not sardines for eating, but for trading (in English, to negotiate)

Marks quotes Warren Buffett to justify that investors should buy stocks to be shareholders, not to trade.

He criticizes investors who only look at short-term returns. In his view, it is not the return of a quarter or year that matters. According to him, the short-term result does not reflect an investor’s skill. Returns must be evaluated in the long term.

To illustrate the theme of volatility and how the investor should be careful in orienting himself by it, he also quotes a quote from Warren Buffett. Buffett reportedly stated “We prefer a lumpy 15% return to a smooth 12% return.” (“We prefer a 15% return that occurs at the end to a smooth 12% return over time”).

He argues that volatility is a temporary phenomenon and more important would be to ensure survival. One of the points raised is to be careful when generalizing volatility as a measure of risk.

For example, in private credit investments, volatility should not be used, as an asset may not fluctuate and you think you are riskless, until you default and lose everything.

Finally, he returns to the theme of trading and suggests that investors should think more about investing for the long term rather than guessing at the direction of the market.

To support his view, he cites an internal study by the Fidelity brokerage that found that the investors who had the highest returns between 2003 and 2013 were those who either died or were inactive. That is, those who have not changed their investments for a long time.

Undoubtedly, there are five lessons to be considered in investments. However, care must be taken in following and generalizing these lessons.

For example, it is not because you keep an unsuccessful investment for a long time that it turns into a success. Likewise, the conservative investor must pay attention to volatility before investing or he may not be able to support the fluctuation of assets and sell at an unfavorable moment because he does not have the ability to withstand the fluctuation.

But, definitely, having a long-term vision in the applications and avoiding trading often like robots trading are excellent advice.

At this link, you can find the entire collection of articles by Howard Marks.

Michael Viriato is an investment advisor and founding partner of Investor House

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