“I think most people would be more successful if they focused less on the short run or macro trends and instead worked hard to gain superior insight concerning the outlook for fundamentals over multi-year periods in the future.”
It’s not rocket science, and we’re sure you’ve heard it before, but it bears repeating. Especially when it comes from Howard Marks. The co-founder of Oaktree Capital Management has become famous for his memos about markets and sensible, long-term investing.
In this memo, he starts with some of the most common questions he gets from clients – which he thinks should not matter:
- How bad will inflation get?
- How much will the Fed raise rates?
- How long will a recession last?
The reason he doesn’t think those questions matter is that they all relate to the short term. And people are not good at making predictions in the short term, and are also unlikely to make major changes to portfolios or strategies based on these short term predictions.
He also explains a number of other things that don’t matter: a trading mentality, short-term company results and volatility. For many classically-trained investors, volatility is seen as risk. But Marks rejects that idea. Risk is the probability of a bad income, of permanent loss of capital, rather than the level of price fluctuations (to be clear, volatility may indicate the presence of risk. But it is not risk itself).
Then Marks concludes by turning to what should matter for investors.
What really matters is the performance of your holdings over the next five or ten years (or more) and how the value at the end of the period compares to the amount you invested and to your needs…. Of critical importance, equity investors should make their primary goals:
(a) participating in the secular growth of economies and companies and
(b) benefiting from the wonder of compounding.
This is an excerpt from our Thought Starters email. Once a week we send you 5 interesting articles that have caught our attention, to get you thinking. No spam, we guarantee.