Howard Marks Memo – What Lies Ahead?​ – 2001

The fourth memo of 2001 is “about the economic and investment implications of the attacks.“. If you haven’t done so already, I recommend that you read the last memo, Notes from New Yorkthat focuses on the more important implications and lessons drawn from these tragic events. Although this memo was written in a specific context and with specific events in mind I would argue that the wisdom in it will continue to stay relevant across time and space. It’s a great memo!

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 What Lies Ahead? – 2001


Looking to the Future – All of economics, business and investing entails dealing with the future. […]

That’s what makes investing interesting, challenging and occasionally lucrative. If it didn’t require us to reach conclusions about the future, or if the future wasn’t uncertain, then everyone’s returns would be the same – but not very high. We achieve high returns on occasion because we deal with an uncertain future, and it’s because the future is uncertain that superior investors can get an edge.

The process of investing consists entirely of divining the future – in terms of profits and values – and translating that future into prices that should be paid today. Obviously, doing so requires a view of what the world will look like tomorrow and how businesses and their products will fare in that world.”

My thoughts: This is a fundamental truth of investing. Unfortunately, this truth is often forgotten or well hidden. The reason for that is that the future per definition is uncertain. As I have said before, investors hate uncertainty. In order to cope with uncertainty, investors have turned their attention towards a probabilistic mindset. I try to employ a probabilistic mindset myself and I would argue so does H. Marks. However, many investors have taken this mindset a step too far. For them, probability has morphed into a concept of certainty. That’s dangerous. Remember, we need a margin of safety if we want to survive in the long term.


“We each make thousands of judgments a day based on our understanding of what’s normal. […]

We must make assumptions like these, even though we know they won’t hold true all the time. If we had to start from scratch every time we faced a decision, the result would be paralysis. Thus we start by assuming that the things that worked in the past are likely to work in the future, but we also make allowances for the possibility that they won’t.

We do the same in our roles as investors. We expect well-managed companies with good products to make money and be valued accordingly. We assume companies that have the money will service their bonds. We count on the economy to recover from slowdowns and grow over time.

So most of our actions depend on extrapolation. Certainly in investing, we rely on forecasts that assume the future will look a lot like the past. And most of the time they’re right.


We all want a feeling of assurance. We want to live in a world where the future seems knowable and decisions that extrapolate normalcy can be depended on. […] So I think we’re eager to embrace predictions that these things will hold true.”

My thoughts: Normal = white swan events. But how about black swan events?


Some of the greatest dilemmas in investing surround highly unlikely events with highly negative implications. It’s hard to know what to do about them, but we should at least be aware of their existence.

We have no alternative to assuming that the future will look mostly like the past, but we also must allow for the fact that we face a range of possible futures today that is wider than usual. In other words, I feel we must allow for greater-than-normal uncertainty.”

My thoughts: The important takeaway from the extract above is “be aware of“. Ignoring (aka swiping under the rug) black swans doesn’t stop them from showing up. So, be prepared!


The Role of Confidence – […] Sometimes I think in the economy, confidence is all there is.

When people are confident, they extrapolate prosperity and borrow and buy. They assume an upward-sloping future and want to jump on board. They worry that if they don’t buy something today, it’ll cost them more tomorrow. That is, they are concerned about the cost of inaction.

When their confidence fades, they worry about losing jobs and defer purchases. They may prefer to build cash or pay down debt. They’re willing to wait before buying, and they assume there’ll be another chance to buy cheaper. In other words, they figure that if they don’t act, they won’t miss out on much. Opportunity costs just don’t seem that important.”

My thoughts: In other words, if you control the confidence you control the economy. This is a powerful realization!


Will I Ever Drop My Cautionary Stance? – […]

[…] I have no interest in being a pessimist or a bear, and I don’t like to think of myself that way. I just may be more impressed by the unknowability of the future than most people. When I reflect on all of the mottoes I use, it seems half of them relate to how little we can know about what lies ahead.

[…] If we insist on a degree of defensiveness that turns out to be excessive, the worst consequence should be that your profits will be a little lower than they otherwise might have been. I don’t think that’s the worst thing in the world.

The longer I’m in this business, the less I believe in investor agility. […] Rather, most people have a largely fixed style and point of view, and the most they can hope for is skill in implementing it – and I don’t exempt Oaktree and myself from that observation.

But that’s not so bad. It’s my conclusion that if you wait at a bus stop long enough, you’re sure to catch your bus, while if you keep wandering all over the bus route, you may miss them all. So Oaktree will adhere steadfastly to its defensive, risk-conscious philosophy and try to implement it with skill and discipline. We think that’s the key to successful long-term investing – especially in today’s uncertain environment.

My thoughts: I admire H. Marks thinking about the future and how to cope with uncertainty in general. As I have said before, I think H. Marks mindset could best be described as an humility-opportunistic-mindset. This is something that I closely try to emulate and develop.

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