Technically Speaking: Howard Marks On Speculative Manias

One of my favorite investing legends is Oaktree Management’s Howard Marks. His investing wisdom and in-depth knowledge of investor psychology and market dynamics are unparalleled. Given the “speculative mania” we continue to watch in the market, I thought a review of some of his previous thoughts is appropriate.

Over the weekend, I re-read some previous research and ran across an interview between Goldman Sach’s Hugo-Scott Gall and Howard Marks. The talk ranged from investment decisions to behavioral dynamics. While the interview occurred in 2013, it is just as relevant as if he said it yesterday.

I have annotated some of the points for clarity.

Investor Psychology

Hugo Scott-Gall: How can we understand investor psychology and use it to make investment decisions?

Howard Marks: It’s the swings of psychology that get people into the biggest trouble, especially since investors’ emotions invariably swing in the wrong direction at the wrong time. When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just the wrong thing to do. It’s important to control fear and greed.

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Howard Marks Speculative Manias, Technically Speaking: Howard Marks On Speculative Manias

Another mistake that people often make is to compare themselves with others who are making more money than they are. They mistakenly conclude they should emulate the others’ actions after they’ve worked. This is the source of the herd behavior that so often gets them into trouble. We’re all human and so we’re subject to these influences, but we mustn’t succumb. This is why the best investors are quite cold-blooded in their professional activities.

(Click on image to enlarge)

Howard Marks Speculative Manias, Technically Speaking: Howard Marks On Speculative Manias

We can infer psychology from investor behavior. That allows us to understand how risky the market is, even though the direction in which it will head can never be known for certain. By understanding what’s going on, we can infer the “temperature” of the market. 

We need to remember to buy more when attitudes toward the market are cool and less when they’re heated. For example, the ability to do inherently unsafe deals in quantity suggests a dearth of skepticism of investors. Likewise, when every new fund is oversubscribed, you know there’s eagerness. 

Howard Marks Speculative Manias, Technically Speaking: Howard Marks On Speculative Manias

Too little skepticism and too much eagerness in an up-market – just like too much resistance and pessimism in a down-market – can be very bad for investment results.

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