Howard Marks Memo – Risk in Today’s Markets – 1994

As the title will tell you, this memo is about the risk that H. Marks argued to be present in the 1994 markets. The risk H. Marks argue are related to two powerful trends. The first being the decline in interest rates to a thirty year low and the second being the “fabulous performance” by almost all securities during the 1991-1993 period. In conclusion, H. Marks argues that the markets at that point are predominated by greed. Reading this memo I can’t stop to think about the resemblance to the market environment that we are currently in. In other words, I believe one should read this memo with the M. Twain quote echoing in one’s head:

History doesn’t repeat itself, but it does rhyme. – M. Twain

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 Risk in Today’s Markets – 1994


“I think it’s important to remember, though, the symmetrical nature of most investments: almost every sword is two-edged, and he who lives by a risky strategy may die by it. Investments which will make you a great deal of money when things go well but not lose you a lot when things go poorly are very rare, and their existence must presuppose extremely inefficient markets.”

My thoughts: Or as W. Buffett likes to say; “Only when the tide goes out do you discover who’s been swimming naked.“.


“Comparison against low interest rates makes low earnings yields and dividend yields seem tolerable. Likewise, low rates increase the discounted present value of companies’ future earnings as calculated by valuation models. For these reasons and others, many valuation indicators are at levels today which have proved dangerous and unsustainable in the past. Just as today’s low interest rates are pushing investors toward riskier securities all along the “food chain” described above, however, this sword can also cut the other way.”

My thoughts: H. Marks explains in a simple way the “consequences” of a market environment with low interest rates. I would argue that we see the exact same thing happening in todays markets, i.e. interest rates are pushing investors toward riskier securities.


“Another adage I’m fond of is, “What the wise man does in the beginning, the fool does in the end.” No course of investment action is either wise or foolish in and of itself. It all depends on the point in time at which it is undertaken, the price that is paid, and how others are conducting themselves at that moment.

When everyone shrinks from a security because it’s “too risky,” the few who will buy it can do so with confidence, secure in the knowledge that the price has not been bid up, and in the likelihood that others will eventually outgrow their fear and jump on the bandwagon. Today, many prices have been bid up, and the bandwagon is already crowded with wild-eyed investors.”

My thoughts: What I would like to highlight in the extract above is the “how other are conducting themselves at the moment” part. You don’t have to know where the bandwagon is going, just make sure that the bandwagon isn’t already “crowded with wild-eyed investors” and force yourself  onto it. It’s perfectly okay to stand on the sidelines when all the seats are taken.


We do not preach risk-avoidance. In fact, the knowing acceptance of risk for profit is at the core of much of what we do, and we feel there is an important role today for investing which is creative and adaptable. But we would take this opportunity to exhort you to review most critically the risk associated with your current and contemplated investments, and not to be among those who uncritically joined the trend toward risk. Whatever investment opportunities you decide on, we would encourage you to stress thorough appraisal of the risks entailed and cautious implementation.”

My thoughts: With so much emphasis on risk-control in the earlier memos it is easy to confuse H. Marks/Oaktree philosophy as being “risk-avoidant“. However, they are far from the same thing as H. Marks points out above.


Exploitation of opportunities in inefficient markets; insistence on preserving capital; refusal to pursue maximum return at the cost of maximum risk; specialization rather than dabbling; heavy emphasis on careful analysis; use of less-risky senior securities — these themes have been the cornerstones of our approach over the years. They remain highly relevant and should continue to be pursued by all of us, especially at this point in the cycle.

My thoughts: With the exception of “use of less-risky senior securities” I aim and hope to establish the same cornerstones in my approach to investing.

Howard Marks Memo – Random Thoughts on the Identification of Investment Opportunities – 1994

The first 1994 letter (there are three more published that year) is more or less a recap and summary of H. Marks previous four letters. As a result, although this letter is a short one (2 pages), it is packed with wisdom in a seven numbered list. Do yourself a favor and read the whole letter, it will be your best investment today. I promise!

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 Random Thoughts on the Identification of Investment Opportunities – 1994


“1. No group or sector in the investment world enjoys as its birthright the promise of consistent high returns.

There is no asset class that will do well simply because of what it is.


2. What matters most is not what you invest in, but when and at what price.

There is no such thing as a good or bad investment idea per se.


There is no security that is so good that it can’t be overpriced, or so bad that it can’t be underpriced.”

My thoughts: Summarized in the extract above is essentially the lessons learnt from the 1992 memo. In times like these, one should repeat them like a mantra on a daily basis.


“3. The discipline which is most important in investing is not accounting or economics, but psychology.

The key is who likes the investment now and who doesn’t. Future prices changes will be determined by whether it comes to be liked by more people or fewer people in the future.

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.

The safest and most potentially profitable thing is to buy something when no one likes it. Given time its popularity, and thus its price, can only go one way: up.


You want to buy things either before they’ve been discovered or after there’s been a shake-out.”

My thoughts: I would make a caveat to this extract above using the B. Graham quote “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Nevertheless, I do agree on the argument that psychology is the most important discipline in investing. That is also the reason why I consider the book Influence by Robert Cialdini to be one of the books an investor has to read.


“4. The bottom line is that it is best to act as a contrarian.

An investment that “everyone” knows to be undervalued is an oxymoron. […]

Yogi Berra said, “nobody goes to that restaurant; it’s too popular.” The equally oxy-moronic investment version is “Everybody likes that security because it’s so cheap.””

My thoughts: This extract is related to the 1993 memo and the importance of establishing non-consensus predictions/forecasts.


“6. As Warren Buffet said, “the less care with which others conduct their affairs, the more care with which you should conduct yours.” When others are afraid, you needn’t be; when others are unafraid, you’d better be.

It is usually said that the market runs on fear and greed. I feel at any given point in time it runs on fear or greed.

[…] But when investors are unafraid, they’ll buy anything. Thus the intelligent investor’s workload is much increased.”

My thoughts: The “fear or greed” part refers to the 1991 memo and the pendulum phenomena. This extract should be read in connection with the next:


“7. Gresham’s Law says “bad money drives out good.” When paper money appeared, gold disappeared. It works in investing too: bad investors drive out good.

When undemanding investors appear, they’ll buy anything. Underwriting standards fall, and it gets hard for demanding investors to find opportunities offering the return and risk balance they require, so they’re forced to the sidelines.

Demanding investors must be willing to be inactive at times.”

My thoughts: This extract reminds me of one of my favorite C. Munger quotes: “Assiduity is the ability to sit on your ass and do nothing until a great opportunities presents itself”. Btw, I can’t help to think about Bitcoin/cryptocurrencies when I read the title to this extract.

Howard Marks Memo – The Value of Predictions, or Where’d All This Rain Come From? – 1993

As you can tell from the title of the 1993 memo, this one is about the most important but also the most tricky aspect of investing, i.e. the future. We all, whether we like it or not, make implicit or explicit predictions about the future when we buy and sell shares, bonds, convertibles etc. We cannot escape this fact given that investing is a future dependent activity.

We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know. – John Kenneth Galbraith

In this memo H. Marks describes “all of the bad things I can think of about predictions“. Although they might all be bad you still have to know about these things in detail if you are to have any chance of doing better than the average investor or a passive investing approach. Similar to my conclusion about the three previous letters, this one is should be a mandatory read for all investors and one that should be re-read at least once a year.

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 The Value of Predictions, or Where’d All This Rain Come From? – 1993


An Average Forecast Doesn’t Help Even If It’s Correct

Being “right” doesn’t lead to superior performance if the consensus forecast is also right. […] Bottom line: correct forecasts do not necessarily translate into superior investment results.

Above-Average Profits Come From Correctly Forecasting Extreme Events


It has since been realized, however, that it’s not earnings changes that cause stock price changes, but earnings changes which come as a surprise. […] The key question is not “What was the change?” but rather “Was it anticipated?” Was the change accurately predicted by the consensus and thus factored into the stock price? If so, the announcement should cause little reaction. If not, the announcement should cause the stock price to rise if the surprise is pleasant or fall if it is not.”

My thoughts: In the extract above H. Marks demonstrates the importance of second-level thinking and the power of using the “reference point” mental model à la Prospect Theory. The above extract should be read in connection with the next:


This raises an important Catch 22. Everyone’s forecasts are, on average, consensus forecasts. If your prediction is consensus too, it won’t produce above-average performance even if it’s right. Superior performance comes from accurate non- consensus forecasts. But because most forecasters aren’t terrible, the actual results fall near the consensus most of the time — and non-consensus forecasts are usually wrong. The payoff table in terms of performance looks like this:

payoff table

The problem is that extraordinary performance comes only from correct non- consensus forecasts, but non-consensus forecasts are hard to make, hard to make correctly and hard to act on.”

My thoughts: First of all, WOW! The first time I came across this extract a few years ago it was like the enlightenment itself. It completely changed my investment thinking. In my opinion, what H. Marks has explained above is the most important thing in investing to grasp if one seeks to be a long-term successful investor. It also serves as the explanation for why all active investors have to per definition define themselves as “contrarian investors”, which is kind of oxymoronic when you think about it. Regarding the last sentence and particularly the “hard to act on” part, the following should be noted:


Extreme Forecasts are Hard to Believe and Act On


Potentially-profitable non-consensus forecasts are very hard to believe and act on for the simple reason that they are so far from conventional wisdom. If a forecast was totally logical and easily accepted, then it would be the consensus forecast (and its profit potential would be much less).


The more a prediction of the future differs from the present, (1) the more likely it is to diverge from the consensus forecast, (2) the greater the profit would be if it’s right, and (3) the harder it will be to believe and act on it.

My thoughts: The above extract reminds me of the “Investing is simple, but not easy.” quote by Warren Buffett. This is especially true when it comes to non-consensus investment ideas.


You Have to Be Right About Timing Too

Not only must a profitable forecast have the event or direction right, but it must be correct as too timing as well.


In poker, “scared money never wins.” In investing, it’s hard to hold fast to an improbable, non-consensus forecast and do the right thing…especially if the clock is telling you the forecast is off base. As I was told years ago, “being too far ahead of your time is indistinguishable from being wrong.

My thoughts: I wouldn’t go as far as saying that timing has to be “correct” when you invest. In my opinion, you should not worry about the effects of timing as long as you make sure to not invest with “scared money” (money that is not yours or that you can’t afford to lose) and your thesis has not been proven to be a mistake of commission. This thinking relates to a title of a H. Marks memo that I will cover in the future; You Can’t Predict. You Can Prepare. Last but not least, a humorous note of wisdom related to the importance of being sceptical:


Lastly, Ask Yourself “Why Me?”

By this I mean “if someone has made a potentially valuable forecast with a high probability of being right, why is it being shared with you?”


Groucho Marx said “I wouldn’t join any club that would have me as a member.” Another formulation may be “I would never act on any forecast that someone would share with me.” I’m not saying that no one has above-average forecasting ability. Rather, ‘as one University of Chicago professor wrote in a paper years ago, such forecasters are more likely to be sunning themselves in Saint Tropez than going around entreating people to borrow their forecasts.

Howard Marks Memo – Microeconomics 101: Supply, Demand and Convertibles – 1992

While this memo is specifically about the supply and demand of convertibles, the relevance of the wisdom it contains is applicable to investing in general. The 1992 memo I see myself frequently going back to and reference as it relates to the discussion about quality vs. price in investing. You will soon see why.

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 Microeconomics 101: Supply, Demand and Convertibles – 1992


Two principal factors determine whether an investment will be successful. The first is the intrinsic quality of the underlying entity being invested in. In short, how good is the venture you are buying a piece of or lending money to? It’s better to invest in a good company than a bad one, ceteris paribus,


Lots of investors take the approach of searching out companies with better products, managements, balance sheets and prospects. Many say they will only buy top quality assets.

My thoughts: This first factor is classical first level thinking in my opinion. All too often I see similar arguments used by investors to rationalize their decision to go long. However, they all forget the ceteris paribus part of the equation which H. Marks so eloquently explains as:


[Ceteris paribus is a favorite term of economists. It means “everything else being equal,” and yes, at a given price, it’s smarter to invest in a better company than a worse one. Of course, “everything else” never is equal, and you’re not likely to be asked to choose between two assets of obviously different quality at the same price.]


The second factor determining whether something will be a good investment is price. Ceteris paribus, given two assets of similar quality, it’s better to pay less than more.

My thoughts: Again we must not fall for the first level thinking. However, unlike the quality aspect of an investment one should give more weight to the price aspect H. Marks argues (and I agree):


We are less concerned with the absolute quality of our companies than with the price we pay for whatever it is we’re getting. In short, we feel “everything is triple-A at the right price”. We have many reasons for following this approach, including the fact that relatively few people compete with us to do so. But we feel buying any asset for less than it’s worth virtually assures success. Identifying top quality assets does not; the risk of overpaying for that quality still remains.


What does all of this have to do with microeconomics? Well microeconomics is the study of the price-setting process, and much of price comes down to a matter of supply and demand.

Ceteris paribus — in this case, holding the level of supply constant — price will be higher if there is more demand and lower if there is less. And that’s why buying when everyone else is can, in and of itself, doom an investment.


Conversely, buying what no one else will buy at any price almost assures eventual success, […]

My thoughts: As the brilliant writer and teacher that he is, H. Marks also explains his thinking in microeconomic terms.

Howard Marks Memo – First Quarter Performance – 1991

The 1991 memo – First Quarter Performance – is short, about one A4 page. Still, there exists two nuggets of wisdom related to the topic of the market pendulum that I would like to highlight and share with you.

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 First Quarter Performance – 1991


The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward an extreme itself that supplies the energy for the swing back.

My thoughts: H. Marks analogy of “the movement of a pendulum” is a brilliant explanation for the regression towards the mean phenomena. The consequences of the pendulum movements and how that is related to you as an individual investor is extremely important to understand. In relation to that H. Marks makes the following statement:


It would be wonderful to be able to successfully predict the swings of the pendulum and always move in the appropriate direction, but this is certainly an unrealistic expectation. We consider it far more reasonable to try to (1) stay alert for occasions when a market has reached an extreme, (2) adjust our behavior slightly in response and, (3) most importantly, refuse to fall into line with the herd behavior which renders so many investors dead wrong at tops and bottoms.


Howard Marks Memo – The Route to Performance (1990)

I have just finished re-reading one of my all-time favorite investing books; The Most Important Thing Illuminated – Uncommon Sense for the Thoughtful Investor by Howard Marks. It is probably the book that has had the greatest impact on how I theoretically think and practically approach investing. Therefore, it is quite embarrassing to admit, as was the case with the Berkshire Hathaway shareholder letters, that I haven’t read all of Marks memos. Although the The Most Important Thing is more or less based on the memos I believe that there are still nuggets of wisdom to be found when reading each memo in detail. To find these nuggets and to restore my pride I thought I would go through all of the memos reading one per day. Also, as I did with the Berkshire letters, I will post five extracts of worldly wisdom’s that caught my attention while reading each memo and share these with you as part of The Worldly Wisdom Project. Hopefully you will find the extracts that I pick as educational and inspiring as I did.

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 The Route to Performance – 1990


If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too.


We have never had a year below the 47th percentile over that period or, until 1990, above the 27th percentile. As a result, we are in the fourth percentile for the fourteen year period as a whole.

My thoughts: The above extracts demonstrate 1. how not to and 2. how to pursue superior investment results. One should note that the first argument (how not to pursue superior investment results) at first glance sounds equally rational and logic as the second. That makes it dangerous, but it also explains why it is easy to fall for what is most likely a fallacy for the individual investor.


I feel strongly that attempting to achieve a superior long term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year — and through discipline to have highly superior relative results in bad times — is: 

– less likely to produce extreme volatility, 

– less likely to produce huge losses which can’t be recouped and, most importantly, 

– more likely to work (given the fact that all of us are only human).

My thoughts: What Marks has laid out above are good and powerful arguments for why the “little better than average” strategy should be employed. Still, I would argue that most investors employ a “top-decile” strategy. Although I understand their reasoning for doing so I will never understand their logic and rationale.


[…] the best foundation for above-average long term performance is an absence of disasters.

My thoughts: This is my favourite sentence in the memo.


There will always be cases and years in which, when all goes right, those who take on more risk will do better than we do. In the long run, however, I feel strongly that seeking relative performance which is just a little bit above average on a consistent basis — with protection against poor absolute results in tough times — will prove more effective than “swinging for the fences.”

My thoughts: This sums up the memo perfectly.


Berkshire Hathaway Shareholder Letter 2017

Last summer I read each Berkshire shareholder letter published during the 1977-2017 period. As a summer reading challenge, I read one letter per day and published my five key takeaways from each letter here on the blog (you can find links to these posts here). Without a doubt, this is one of the most important and instructive reads related to investing that I have ever come across. Most likely, I will re-read them all this coming summer.

Today is the day when the 2017 letter is published. As I had already planned to read the letter once it was published I thought it would be nice idea to keep my five key takeaways tradition going. Although Warren and Charlie aren’t getting any younger I hope to continue with this tradition for years to come.

From the 2017 letter I have picked extracts of wisdom related to the following topics: how to sleep well; people > physical assets; lessons from Kipling; looking unimaginative and foolish and skin in the game.

Please comment if you have read the letter and what you thought of it. Also, if you have found a worldly wisdom in the letter 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 Berkshire Hathaway Shareholder Letter – 2017


“Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so “partners” have joined us at Berkshire.”


“Betting on people can sometimes be more certain than betting on physical assets.”


“Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure longterm growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips. Here are the gory details:

Skärmavbild 2018-02-24 kl. 14.07.18

This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.

In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow. When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:

“If you can keep your head when all about you are losing theirs . . .

If you can wait and not be tired by waiting . . .

If you can think – and not make thoughts your aim . . .

If you can trust yourself when all men doubt you . . .

Yours is the Earth and everything that’s in it.””


“Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”


“For good reason, I regularly extol the accomplishments of our operating managers. They are truly All-Stars who run their businesses as if they were the only asset owned by their families. I also believe the mindset of our managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most of our managers have no financial need to work. The joy of hitting business “home runs” means as much to them as their paycheck.

If managers (or directors) own Berkshire shares – and many do – it’s from open-market purchases they have made or because they received shares when they sold their businesses to us. None , however, gets the upside of ownership without risking the downside. Our directors and managers stand in your shoes.”