Howard Marks Memo – Are You An Investor or a Speculator? – 1997

The 1997 memo focuses on an old and seemingly never-ending debate. Other investing gods, e.g. B. Graham, W. Buffett and S. Klarman, have written their fair share about what they think separates the concepts of investing/investor vs. speculation/speculator. While we’re on the topic, I recommend that you read the following article by R. Hagstrom titled What Is the Difference between Investing and Speculation?.

Please comment if you have read the memo and what you thought of it. Also, if you have found a worldly wisdom in the memo that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Worldly wisdom’s from Are You An Investor or a Speculator? – 1997

1.

“In short, we believe (and have witnessed many times over) that the easiest way to make unusually high risk-adjusted returns is to buy from depressed sellers and sell to euphoric buyers…thus to buy when assets are underpriced and sell when they’re overpriced. The opposite is a nightmare.”

My thoughts: “Investing is simple, but not easy.” as W. Buffett likes to say.

2.

“John Maynard Keynes said (roughly) that “a speculator is someone who takes risks of which he is aware, and an investor is someone who takes risks of which he is unaware.” We think speculating, according to this definition, is more prudent than investing. It makes a lot of sense to purchase unpopular assets that promise excessive compensation for knowingly bearing risk. Buying high- priced, popular assets which “everyone knows have no risk” often proves terribly dangerous.”

My thoughts: The extract above demonstrates the difficulty in separating these two concepts. On this specific debate I would agree with H. Marks argument.

3.

“We’re not expecting any surprises,” people say, and that has become our new favorite oxymoron. Surprises are never expected — by definition — and yet they’re what move the market. (If they were expected, their effects would already be priced into the market, rendering a price reaction unnecessary.) The next surprise might be geo-political (oil embargo, war in Korea), economic (tight money, slowing profit growth) or internal to the market (competition from bonds at higher interest rates, discovery of a fraud), but it’s most likely to be something that no one has anticipated – – including us.”

My thoughts: I laughed hard when I read this part of the memo. It’s spot on. When you hear the words “We’re not expecting any surprises” you should ask the individual who expressed that statement in what areas he/she is most certain and confident. Oxymoronly, it is probably in those areas surprises will most likely show up.

4.

“What does all of this tell us? That we must return yet again to what may be the greatest Warren Buffet quote: The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs. Prudence is in short supply today, along with skepticism and disbelief. Thus we must be disciplined and selective in our investing today, and postpone our greatest enthusiasm for the bargains which are likely to be found in the months and years ahead.”

My thoughts: I have included similar extracts to the one above by H. Marks from earlier memos. Nonetheless, I think you should pay special attention to the last sentence in this particular extract. I like the fact that H. Marks frames “patience” not in terms of lowering enthusiasm but rather to “postpone” it. I would argue, thinking in terms of postponing your enthusiasms will help to decrease your FOMO and as a result fewer mistakes of commission will be made.

5.

“We have been privileged to read a recent letter from Julian Robertson to his investors. In it, Robertson compares today’s fund managers to the Phoenician sea captains of thousands of years ago who were paid a percentage of the value of the goods they transported and thus were incentivized to design boats which emphasized speed over safety. This worked as long as the weather was good, but the storms that eventually came consigned the less safe ships to the bottom of the sea. He goes on as follows:

The last several years have been a great period for the audacious captains with their fleets of fair-weather ships. There has not been a storm for years; perhaps climatic conditions have changed and there will never be another storm. In this scenario the audacious crew with its fleet of swift but flimsy ships is the cargo carrier of choice.

[…]

This metaphor suits Oaktree exactly; we couldn’t say it better. Being prepared for stormy weather, even if it could cost us some of the easy money in good times, is certainly the course for us.”

My thoughts: This is an awesome summary of this memo in my opinion. The metaphor ties together the statement “We’re not expecting any surprises” with the debate of what defines and differentiates investors vs. an speculators.

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