Howard Marks Memo – Genius Isn’t Enough (and Other Lessons from Long-Term Capital Management) – 1998

The second 1998 memo is a bit longer than the previous ones. It’s a deep dive case study about the rise and fall of Long Term Capital Management and the lessons thereof. As the title of the memo will tell you, being a genius isn’t enough. To the contrary, it might have a negative effect on your ability to succeed. I truly recommend that you read the whole memo as this one is particularly interesting.

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 Genius Isn’t Enough (and Other Lessons from Long-Term Capital Management) – 1998

1.

“In his wonderful book, Against the Gods, Peter Bernstein shows how development of the study of probability made possible both informed gambling and informed investing (along with other forms of decision making concerning the future). But the products of this pursuit remain mere probabilities, or reasonable expectations. Likely events sometimes fail to occur, and unlikely events sometimes do. Or, as my friend Bruce Newberg says when I get the one improbable roll of the dice needed to beat him in backgammon, “there can be a big difference between probability and outcome.” If you are conscious of the difference between a likely outcome and a certain one, you may not want to bet the ranch.”

My thoughts: In summary; probability ≠ outcome. As the memo demonstrate and explains, relying on the opposite being true can create the path towards a black swan event.

2.

“I think investors are always looking for “the silver bullet.” They seek a course of action that will lead to large profits without risk […]. Often, they align themselves with “geniuses” who they hope will make it easy for them […].

But the silver bullet doesn’t exist. No strategy can produce high rates of return without some risk. And nobody has all of the answers; we’re all just human. Brilliance, like pride, often goes before the fall. Not only is it insufficient to enable those possessing it to control the future, but awe of it can cause people to follow without asking the questions they should and without reserving enough for the rainy day that inevitably comes. This is probably the greatest lesson of Long-Term Capital Management.”

My thoughts: This is an important reminder to always asses ‘investment ideas’ as ideas. Independent of who came up with the them, investment ideas are not absolute truths for how the future will turn out. Once you have accepted that the silver bullet doesn’t exist you will stop looking for it. Or maybe not:

3.

“When I was a kid, my dad used to joke about the habitual gambler who finally heard about a race with only one horse in it. He bet the rent money on it, but he lost when the horse jumped over the fence and ran away. There is no sure thing, only better and worse bets, and anyone who invests without expecting something to go wrong is playing the most dangerous game around.”

4.

“5) “Never confuse brains with a bull market.” When the 1990s began, the economy and the stock market were at very low levels. As a result, success came easily, risk-bearing paid off and the highest returns often went to those who took the most risk. They and their strategies were accepted as the best.

In my opinion, (a) the three ingredients behind success are timing, aggressiveness and skill, and (b) if you have enough aggressiveness at the right time, you don’t need that much skill. But those who have attained their success primarily through well-timed aggressiveness can’t be depended on to repeat it — especially in tough times. When an investment track record is considered, it’s essential that the relative roles of these three factors be assessed“

My thoughts: Anytime I hear the word “genius” or “expert” an alarm goes of in my head. Most often, people get credited with those words although they have not yet anything to show for their antifragility.

5.

“Oaktree is built on the following axioms (among many others):

— We can’t know everything about the future, and the “bigger picture” the question, the less we can know the answer.

— We must always expect that something will go wrong and build in margin for error.

— When the market embodies too much greed, we must be conscious of the risk that’s present. When it swings too far toward fear, we should take advantage of the bargains that result.

— We must constantly remind ourselves of our limitations and dedicate ourselves to the avoidance of hubris. If our methodologies are valid and our people are talented, hubris is one of the few things that could make us fail.“

My thoughts: This is such a great list, I especially appreciate the last point.

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