Holding and adding to declining positions is only a good idea if the underlying thesis turns out to be right and things eventually go as expected.
Investor faces uncertainty in investing. An investor having a sense of uncertainty is not a bad thing.
Howard Mark shared his experiences:
• “Investing scared” – a less glamorous term than “applying appropriate risk aversion” – will push you to
- do thorough due diligence,
- employ conservative assumptions,
- insist on an ample margin of safety in case things go wrong, and
- invest only when the potential return is at least commensurate with the risk.
In fact, I think worry sharpens your focus. Investing scared will result in making fewer mistakes (although perhaps at the price of failing to take maximum advantage of bull markets).
• When I started investing in high yield bonds in 1978, and when Bruce Karsh and I first targeted distressed debt in 1988, it seemed clear that the route to long-term success in such uncertain areas lay in limiting losses rather than targeting maximum gains. That approach has permitted us to still be here, while many one-time competitors no longer are.
• I can tell you that in the Global Financial Crisis, following the bankruptcy of Lehman Brothers, we felt enormous uncertainty. If you didn’t, there was something wrong with you, since there was a meaningful possibility the financial system would collapse. When we started buying, Bruce came to me often saying, “I think we’re going too slow,” and then the next day, “I think we’re going too fast.” But that didn’t keep him from investing an average of $450 million per week over the last 15 weeks of 2008. I think Bruce’s ability to grapple with his doubts helped him arrive at the right pace of investment.
The topic of dealing with what you don’t know brings me to a phrase I came across a few years ago and think is very important: intellectual humility.
- In other words, when do you allow for the possibility that you’re wrong?
- When does reason-based confidence turn into hubris and obstinateness?
Investor faces uncertainty in investing. An investor having a sense of uncertainty is not a bad thing.
Howard Mark shared his experiences:
• “Investing scared” – a less glamorous term than “applying appropriate risk aversion” – will push you to
- do thorough due diligence,
- employ conservative assumptions,
- insist on an ample margin of safety in case things go wrong, and
- invest only when the potential return is at least commensurate with the risk.
In fact, I think worry sharpens your focus. Investing scared will result in making fewer mistakes (although perhaps at the price of failing to take maximum advantage of bull markets).
• When I started investing in high yield bonds in 1978, and when Bruce Karsh and I first targeted distressed debt in 1988, it seemed clear that the route to long-term success in such uncertain areas lay in limiting losses rather than targeting maximum gains. That approach has permitted us to still be here, while many one-time competitors no longer are.
• I can tell you that in the Global Financial Crisis, following the bankruptcy of Lehman Brothers, we felt enormous uncertainty. If you didn’t, there was something wrong with you, since there was a meaningful possibility the financial system would collapse. When we started buying, Bruce came to me often saying, “I think we’re going too slow,” and then the next day, “I think we’re going too fast.” But that didn’t keep him from investing an average of $450 million per week over the last 15 weeks of 2008. I think Bruce’s ability to grapple with his doubts helped him arrive at the right pace of investment.
The topic of dealing with what you don’t know brings me to a phrase I came across a few years ago and think is very important: intellectual humility.
Reference:
In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”
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