Howard Marks – Ditto

In Howard Marks last piece he goes through cycles rationale, how history rhymes as time goes by and the propensity of humans toward risk taking. The latter naturally has to do with behaviorism and how it affects returns. Behaviorism and being a contrarian at right time is a path to success. Below follows some quotes from the document:

“It’s not asset quality that determines investment risk. (…) But, all other things being equal, the price of an asset is the principal determinant of its riskiness.(…) Bottom line: No asset is so good that it can’t be bid up to the point where it’s overpriced and thus dangerous. And few assets are so bad that they can’t become underpriced and thus safe (not to mention potentially lucrative). Since participants set security prices, it’s their behavior that creates most of the risk in investing.”

“Becoming more and less risk averse at the right time is a great way  to enhance nivestment performance.”

“To be a successful contrarian, you have to be able to:

  • see what most people are doing, 
  • understand what’s wrong about most people’s behavior,
  • possess a strong sense for intrinsic value, which most people ignore at the extremes,
  • resist the psychological pressures that make most people err, and thus
  • buy when most people are selling and sell when most people are buying.”
“”There are times for aggressiveness. I think this is a time for caution.” Here as 2013 begins, I have only one word to add: ditto.”