Howard Marks, the co-founder of $160 billion asset manager Oaktree, has been busy writing memos lately. In this one he writes about how investors must think and what they must do to earn differentiated returns.
“If you hope to distinguish yourself in terms of performance, you have to depart from the pack. But, having departed, the difference will only be positive if your choice of strategies and tactics is correct and/or you’re able to execute better.”
This memo outlines some of the ways Marks thinks investors can depart from the pack. The first is a focus on second level thinking (made famous in Daniel Kahneman’s book Thinking Fast and Slow). Marks also writes about the need to be a contrarian thinker. To be a contrarian, you must risk being wrong (often very wrong) and that can be uncomfortable for an investor. As Marks writes, “Most great investments begin in discomfort”.
We are living through a moment of great discomfort now. Any investor that is deploying money into the market is doing so with the knowledge that the macro environment is full of risk and the chances of losing some of the money invested in the short term is quite high. But being a long term thinker is critical to build great investment returns. As Marks finishes his memo,
“Many investors – and especially institutions such as pension funds, endowments, insurance companies, and sovereign wealth funds, all of which are relatively insulated from the risk of sudden withdrawals – have the luxury of being able to focus exclusively on the long term …if they will take advantage of it. Thus, my suggestion to you is to depart from the investment crowd, with its unhelpful preoccupation with the short term, and to instead join us in focusing on the things that really matter.”
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