Knee-jerk Dismissiveness

“Broad observations about historic calculations are not a sufficient foundation for market opinions today”

This quote comes from the latest Howard Marks memo, which is the best thing he’s written in a long time, maybe ever.

Marks is known for being a value investor, which requires a heavy dose of skepticism. This serves investors very well in certain market environments, and less well in others, like today for example. In “Something of Value,” Marks takes a deep look inwards at some of his biases. I don’t say this in an accusatory way, I cannot give him enough praise for this piece. We all have biases. We don’t all take the time to recognize them.

Here, Marks writes about his experiences as a value investor:

Many of the great bonanzas for value investors have come in periods of panic following the bursting of bubbles, and this fact has probably led value investors to be very skeptical of market exuberance, especially when concerning companies whose assets are intangible. Skepticism is important for any investor; it’s always essential to challenge assumptions, avoid herd mentality, and think independently. Skepticism keeps investors safe and helps them avoid things that are “too good to be true.”

But I also think skepticism can lead to knee-jerk dismissiveness. While it’s important not to lose your skepticism, it’s also very important in this new world to be curious, look deeply into things, and seek to truly understand them from the bottom up, rather than dismissing them out of hand. I worry that value investing can lead to the rote application of formulas and that, in times of great change, applying formulas that are based on past experience and models of the prior world can lead to massive error. John Templeton warned about the risk that’s created when people say “it’s different this time,” but he also allowed that 20 percent of the time they’re right. Given the rising impact of technology in the 21st century, I’d bet that percentage is a lot higher today.


Something of value

Josh and I got into this and much more in our latest episode of What Are Your Thoughts?

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